IMF Working Papers

We present new evidence on the impact of fiscal variables on long-term interest rates and term premia in the United States. To alleviate endogeneity problems, we follow the seminal methodology by Laubach (2009) and resort to long-term projections of interest rates and fiscal variables. After incorporating an additional 20 years of data into our sample, the estimated effects of debt and deficits on interest rates show little change from Laubach’s findings. However, we show that the link between longterm 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 it has been increasing since fiscal positions have started to deteriorate markedly.