Fiscal Constraints and the Power of Words: Does High Debt Mute the Fed?

Thanos Andrikopoulos, Apostolos G. Katsafados and Steven Ongena
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Thanos Andrikopoulos: University of Sussex Business School
Apostolos G. Katsafados: Athens University of Economics and Business - Department of Accounting and Finance; Bank of Greece
Steven Ongena: University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

No 26-47, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We test whether high public debt is associated with reduced effectiveness of Federal Reserve communication. Using voice sentiment measures extracted from FOMC press conference Q&A sessions, we estimate local projections and find that high debt significantly attenuates the estimated association between voice sentiment and industrial production. The attenuation is particularly strong for hawkish (anger) and dovish (happiness) emotional tones, and for overall positive voice sentiment. Our results are robust to a series of robustness checks, including alternative lag lengths, monetary policy controls, and textual sentiment as a control. These results align with fiscal constraint theories and extend recent evidence on debt and monetary policy transmission, suggesting that elevated public debt weakens not only conventional interest-rate policy but also the power of forward guidance and central bank signaling.

Keywords: Monetary Policy; Government Debt; Central Bank Communication; Voice Sentiment; Fiscal Constraints (search for similar items in EconPapers)
JEL-codes: G21 G32 K32 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2026-06
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