How Important are Debt and Growth Expectations for Interest Rates?
IMF Working Papers, May 1, 2015
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- How Important are Debt and Growth Expectations for Interest Rates?
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Bibliographic details
- Authors: Sohrab Rafiq
- Published: May 1, 2015
- Series: IMF Working Papers
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.
- Results show 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.
Key findings and statistics
- A one-percent rise in the long-run projected debt-to-GDP ratio → increase in bond yields of 1-to-6 basis points.
- Shocks to growth expectations and to private-sector risk aversion explain long-term rate behavior more effectively than long-run debt projections.
Policy implications
- Emphasis on growth policies as a lever to influence long-term borrowing costs.
- Long-run projections of fiscal outcomes appear less influential for long-term interest rates than changes in growth expectations and risk aversion.