Debt, deficits and interest rates

Bibliographic Data

ID9725934
AuthorsChristopher D Cotton (Federal Reserve Bank of Boston, corresponding author)
Year2024
Volume91
Issue363
Pages911-943
Publication date2024-07-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueEconomica (JOURNAL)
Journal identifiersISSN: 0013-0427 • E-ISSN: 1468-0335
PublisherWiley (PUBLISHER • GB)
DOI10.1111/ecca.12521
OpenAlexW4226300697
LanguageEN
References cited18

This paper identifies how a rise in the deficit/debt impacts interest rates by looking at the high‐frequency response of interest rates to fiscal surprises. The fiscal surprises are the unexpected components of deficit releases and the changes in official forecasts by the Congressional Budget Office and by the Office of Management and Budget. The paper estimates that a rise in the deficit‐to‐GDP ratio of 1 percentage point raises the 10‐year nominal interest rate by 8.1 basis points. The response is similar quantitatively for other Treasury maturities and for corporate debt interest rates. The paper also investigates which theoretical channel drives this relationship, and whether surprises affect interest rate expectations or the term premium. These results are used to estimate how recent spending may have affected interest rates

Basis point · Debt · Debt ratio · Deficit spending · Economics · Interest rate · Macroeconomics · Monetary economics · Point (geometry) · Real interest rate · Treasury · Financial Literacy, Pension, Retirement Analysis · Fiscal Policies and Political Economy · Monetary Policy and Economic Impact

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Open DOIOpen Access