Revisiting the Interest Rate Effects of Federal Debt

Michael Plante, Alexander Richter and Sarah Zubairy

No 2513, Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper revisits the relationship between federal debt and interest rates. A common approach in the literature is to regress an expected interest rate on a projection of federal debt. We show that issues related to nonstationarity have become more pronounced over the last 20 years, raising significant concern about the reliability of estimates from this model. We argue that estimating the model in first differences rather than in levels addresses these concerns. Our preferred specification indicates that a 1 percentage point increase in the debt-to-GDP ratio raises the 5-year-ahead, 5-year Treasury rate by 3 basis points. About three-quarters of the increase in interest rates is driven by term premium rather than expected short-term real rates.

Keywords: fiscal policy; federal debt; federal deficit; interest rates; term premium (search for similar items in EconPapers)
JEL-codes: E43 E63 H63 (search for similar items in EconPapers)
Pages: 25
Date: 2025-04-23
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:99902

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DOI: 10.24149/wp2513

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