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Take it to the Limit: The Debt Ceiling and Treasury Yields

David B. Cashin, Erin E. Syron Ferris, Elizabeth Klee and Cailey Stevens

No 2017-052, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: We use the 2011 and 2013 U.S. debt limit impasses to examine the extent to which investors react to a heightened possibility of financial contagion. To do so, we first model the response of yields on government debt to a potential debt limit "breach." We then demonstrate empirically that yields on all Treasuries rose by 4 to 8 basis points during both impasses, while excess yields on bills at risk of delayed principal payments were significantly larger in 2013. Perhaps counterintuitively, our model suggests market participants placed a lower probability on financial contagion resulting from a breach in 2013.

Keywords: Debt limit; Financial contagion; Political uncertainty; Treasury yields (search for similar items in EconPapers)
JEL-codes: G12 G18 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Date: 2017-05
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-52

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DOI: 10.17016/FEDS.2017.052

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