The Impact of Debt and Deficits on Long-Term Interest Rates in the US

Author: Davide Furceri, Carlos Goncalves, and Hongchi Li

Volume/Issue: Volume 2025 Issue 142

Publication date: July 2025

ISBN: 9798229016964

$20.00

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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Banks and Banking , Economics- Macroeconomics , Demography , Debt , Deficit , Interest Rate , Term Premia , impact of debt , Laubach's finding , projections of interest rates , debt forecast , inflation expectation , Long term interest rates , Fiscal stance , Short term interest rates , Population growth , Global

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Summary

We present new evidence on the impact of fiscal variables on long-term interest rates and term premia in the United States. To alleviate endogeneity problems, we follow the seminal methodology by Laubach (2009) and resort to long-term projections of interest rates and fiscal variables. After incorporating an additional 20 years of data into our sample, the estimated effects of debt and deficits on interest rates show little change from Laubach’s findings. However, we show that the link between longterm rates and fiscal variables is not stable over time. It was close to zero during the years of relative fiscal prudence around the turn of the century and it has been increasing since fiscal positions have started to deteriorate markedly.