How Important are Debt and Growth Expectations for Interest Rates?

Author/Editor:

Sohrab Rafiq

Publication Date:

May 1, 2015

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper uses a dataset on private-sector risk aversion as well as expectations of long-run growth and debt to explain trends in implied forward rates on government bonds in the G-7 countries. The results show, consistent with the literature, that a one-percent rise in the long-run projected debt-to-GDP ratio causes an increase in bond yields of a relatively modest 1-to-6 basis points. Shocks to growth expectations and risk aversion have been comparatively more successful in explaining the behavior of long-term rates. The findings imply that growth policies rather than long-run projections of fiscal outcomes may be more important in helping influence long-term borrowing costs.

Series:

Working Paper No. 2015/094

Subject:

Financial crises Financial services Global financial crisis of 2008-2009 Long term interest rates National accounts Private debt Public debt Yield curve

English

Publication Date:

May 1, 2015

ISBN/ISSN:

9781484358603/1018-5941

Stock No:

WPIEA2015094

Pages:

27

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