The Causal Effect of Debt on Interest Rates

Abhik Bhatt, Anthony M. Diercks, Benjamin Eyal and Arsenios Skaperdas
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Anthony M. Diercks: https://www.federalreserve.gov/econres/anthony-m-diercks.htm

No 2026-031, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper uses a natural experiment to measure the causal effect of an expected debt-financed fiscal stimulus on interest rates. We find that a 1 percentage point increase in the expected US debt-to-GDP ratio leads to an increase of about 1-2 basis points in the longer-run neutral rate (r∗) and of about 2–3 basis points in the 10-year Treasury term premium. Our results validate estimates from a common time-series approach that regresses long-term forward interest rates on long-term projections of government debt, where the exclusion restriction does not apply.

Keywords: government debt; Treasury yields; r-star (r*); neutral rate; term premiums; fiscal sustainability (search for similar items in EconPapers)
JEL-codes: E43 E63 H63 (search for similar items in EconPapers)
Pages: 23 p.
Date: 2026-05-26
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:103341

DOI: 10.17016/FEDS.2026.031

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