NEW EVIDENCE ON THE INTEREST RATE EFFECTS OF BUDGET DEFICITS AND DEBT

By Thomas Laubach. 2009

772 citations recorded by the source corpus.

Estimating the effects of government debt and deficits on Treasury yields is complicated by the need to isolate the effects of fiscal policy from other influences. To control for the effects of the business cycle, and associated monetary policy actions, on debt, deficits, and interest rates, this paper studies the relationship between long-horizon forward rates and future federal government deficits and debt as projected by the Congressional Budget Office. For the entire 30-year sample for which these projections are available, the estimated effects of government deficits and debt on interest rates are statistically significant and economically relevant: about 25 basis points per percentage point increase in the projected deficit/GDP ratio, and 3 to 4 basis points for the debt/GDP ratio. Under plausible assumptions the parameter estimates are shown to be consistent with predictions from the neoclassical growth model. (JEL: E6, H6) (c) 2009 by the European Economic Association.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/f1d230f6652b537eb858c97ca32a09e4c85b7827

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In Economics and Econometrics

Citations in the corpus

The Macroeconomics of Central Bank Issued Digital Currencies (2016, neutral): “Laubach (2009), Engen and Hubbard (2004) and Gale and Orszag (2004) report empirical estimates, for the United States, of the elasticity Ξ (in percent per annum) of the real interest rate rt with respect to changes in the government debt-to-GDP ratio b rat t (in percentage points).”
Fiscal Stimulus with Spending Reversals (2009, neutral): “For a general discussion see Leeper (1991). We should stress that our parameter choice does not necessarily reflect explicit debt or deficit constraints as enacted in several countries.”
The macroeconomic effects of fiscal policy (2012, neutral): “Ramey and Shapiro (1998) use a ‘narrative approach’ to isolate political events, and find that, after a brief rise in government spending, nondurable consumption displays a small decline while durables consumption falls.”
Banking and Sovereign Risk in the Euro Area (2010, neutral): “Laubach (2009) and Evans (1987) highlight the importance of expected future budget deficits for interest rates in the US.”
Large-scale asset purchases by the Federal Reserve: did they work? (2010, neutral): “…variables we examine are the two-year and ten-year Treasury yields, the ten-year agency debt yield, the current-coupon thirty-year agency MBS yield, the ten-year Treasury term premium (based on Kim and Wright [2005]), 28 See Engen and Hubbard (2005), Gale and Orszag (2004), and Laubach (2009).”
Determinants of sovereign yield spreads in the Eurozone: A Bayesian approach (2012, background): “Examples for other papers dealing with the US are Gale and Orszag (2004), Laubach (2003), and Poterba and Rueben (1999).”
The Impact of High and Growing Government Debt on Economic Growth: An Empirical Investigation for the Euro Area (2010, positive): “While the results regarding the relationship between public debt/government balance and the long-term interest rates need further investigation, they are broadly in line with conclusions of recent studies such as Ardagna et al. (2007) and Laubach (2009).”
The Chicago Plan Revisited (2012, background): “This option is considered in the government versions of the plan formulated by Means (1933) and Currie (1934), and also in the academic proposal by Angell (1935).”