The Interest Rate Effects of Government Debt and Deficits: Does Domestic Borrowing Have a Different Impact Than Foreign Borrowing?

Jonathan Davis and Lillian Derr

No 2614, Working Papers from Federal Reserve Bank of Dallas

Abstract: We investigate the relationship between government debt and interest rates. We ask whether the effect of government debt on interest rates depends on whether that debt is financed at home or abroad. We extend the work of previous studies that have estimated the effect of expected government debt or deficits on interest rates, and we add an international dimension by incorporating forecasts of the current account balance or net foreign asset position. We find that an increase in government debt financed from domestic savings has less of an effect on interest rates than an increase in government debt financed by foreign borrowing, and government debt has less of an effect on interest rates in a country that is a net international creditor than one that is a net international debtor.

Keywords: government bond yields; government debt; current account (search for similar items in EconPapers)
JEL-codes: E6 F3 F4 H6 (search for similar items in EconPapers)
Date: 2026-06-22, Revised 2026-07-10
New Economics Papers: this item is included in nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:103436

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DOI: 10.24149/wp2614r1

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