An Expanded and Updated Analysis of the Federal Debt's Effect on Interest Rates

Mark Warshawsky and John Mantus
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Mark Warshawsky: American Enterprise Institute

AEI Economic Perspectives, 2022

Abstract: This report expands on a standard empirical estimation of the relationship between federal deficits and debt and long-term interest rates. It follows closely a 2019 long blog post by Ernie Tedeschi, which is itself an update and extension of Francis Warnock and Veronica Cacdac Warnock (2009). Using data from September 1981 to May 2022, we find that a 1 percentage point increase in the federal debt-to-gross-domestic-product ratio is associated with an increase of nearly five basis points in the long-term interest rate. This is a larger effect than generally found in the literature and double what the Congressional Budget Office uses in its budget projections, which we attribute to our more complete specification of Federal Reserve policy.

Keywords: AEI Economic Perspectives; federal debt; Federal Reserve; interest rates (search for similar items in EconPapers)
JEL-codes: A (search for similar items in EconPapers)
Date: 2022
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