IMF Working Papers

Government Debt and Long-Term Interest Rates

By Noriaki Kinoshita

March 1, 2006

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Noriaki Kinoshita. "Government Debt and Long-Term Interest Rates", IMF Working Papers 2006, 063 (2006), accessed July 16, 2025, https://doi.org/10.5089/9781451863239.001

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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 examines the relationship between government debt and long-term interest rates. A dynamic general equilibrium model that incorporates debt nonneutrality is specified and solved, and numerical simulations using the model are undertaken. In addition, empirical evidence using panel data for 19 industrial countries is examined. The estimation provides some evidence supporting the theoretical predictions: the paper finds that the simulated and estimated interest rate effects of government debt tend to be small. However, an increase in government consumption and debt leads to a considerably larger effect. The paper also argues that, although the interest rate effects of pure crowding out may be limited, the economic impact of accumulating government debt cannot be ignored.

Subject: Financial services, Government consumption, Government debt management, Long term interest rates, National accounts, Public debt, Public financial management (PFM), Real interest rates

Keywords: Crowding out, Crowding-out effect, Debt, Debt level, Debt measure, Debt neutrality, Dynamic general equilibrium model, Government consumption, Government debt, Government debt management, Government debt result, Increase in government debt, Interest rate effects of an increase, Long term interest rates, Long-term interest rates, Physical capital, Production function, Real interest rates, Results from an increase, Simulated interest rate effect, Simulated interest rate effect of government debt, Steady-state interest rate effects, WP, Yield

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