An Expanded and Updated Analysis of the Federal Debt’s Effect on Interest Rates
Abstract
This report expands on a standard empirical estimation of the relationship between federal deficits and debt and long-term interest rates. It follows closely a 2019 long blog post by Ernie Tedeschi, which is itself an update and extension of Francis Warnock and Veronica Cacdac Warnock (2009). Using data from September 1981 to May 2022, we find that a 1 percentage point increase in the federal debt-to-gross-domestic-product ratio is associated with an increase of nearly five basis points in the long-term interest rate. This is a larger effect than generally found in the literature and double what the Congressional Budget Office uses in its budget projections, which we attribute to our more complete specification of Federal Reserve policy.
John Mantus
PhD Student, Engineering and Public Policy, Carnegie Mellon University
I am a first-year PhD Student in Carnegie Mellon’s Engineering and Public Policy Department. My advisor is Nicholas Muller, the Lester and Judith Lave Professor of Economics, Engineering, and Public Policy. My research focuses on power outages and their effects on health outcomes and asset prices.