The Impact of Debt and Deficits on Long-Term Interest Rates in the US
IMF Working Papers, July 11, 2025
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- The Impact of Debt and Deficits on Long-Term Interest Rates in the US
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Bibliographic details
- Authors: Davide Furceri, Carlos Goncalves, Hongchi Li
- Published: July 11, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229016964.001
Summary
- Presents new evidence on the impact of fiscal variables on long-term interest rates and term premia in the United States.
- To alleviate endogeneity problems, follows the methodology by Laubach (2009) and uses long-term projections of interest rates and fiscal variables.
- Incorporates an additional 20 years of data into the sample.
- Finds that estimated effects of debt and deficits on interest rates show little change from Laubach’s findings after the extended sample.
- Shows that the link between long-term 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 has been increasing since fiscal positions have deteriorated markedly.
Methodology
- Adopts the seminal methodology by Laubach (2009) to address endogeneity between fiscal variables and interest rates.
- Relies on long-term projections of interest rates and fiscal variables as core inputs to the estimation strategy.
- Extends the sample by incorporating an additional 20 years of data relative to earlier implementations.
Key Findings
- Estimated effects of debt and deficits on long-term interest rates remain broadly similar to Laubach’s findings after adding 20 years of data.
- Time-variation in the fiscal–rate relationship:
- Relationship close to zero during the period of relative fiscal prudence around the turn of the century.
- Relationship has been increasing as fiscal positions have deteriorated markedly in more recent years.
- Focuses on impacts for both long-term interest rates and term premia in the US context.
Subject Areas and Keywords
- Subject areas: Financial services; Fiscal policy; Fiscal stance; Long term interest rates; Population and demographics; Population growth; Short term interest rates.
- Keywords: Debt; debt forecast; Deficit; Fiscal stance; Global; impact of debt; inflation expectation; Interest Rate; Laubach's finding; Long term interest rates; Population growth; projections of interest rates; Short term interest rates; Term Premia.
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