Federal Government Debt and Interest Rates

AEI's working paper series
Download file This working paper is available as an Adobe Acrobat PDF.

Summary

Past research on the effect of government debt on interest rates have found mixed results, from a large effect to none at all, depending on the approach used. Using a standard set of data and a simple analytical framework, the authors reconsider and add to empirical evidence on the effect of federal government debt on interest rates.

First, the effect of government debt on the real interest rates is analytically derived, and it is found that an increase in government debt equivalent to 1 percent of GDP would increase the real interest rate by two to three basis points.

The authors then do an empirical analysis in two parts: first, a variety of conventional reduced-form specifications linking forward-looking and current measures of interest rates and forward-looking and current measures of government debt and other variables are examined, and second, evidence using vector autoregression analysis is provided. In general, the results are consistent with what was predicted in the simple analytical calculation.

Eric M. Engen is a resident scholar, and R. Glenn Hubbard a visiting scholar, at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

R. Glenn
Hubbard

What's new on AEI

Study: Piketty tax plan would boost equality by making rich less rich. But poor would be poorer, too
image Rep. McCaul’s cybersecurity information sharing center: If you build it, will they come?
image Halbig and its aftermath
image Culture of how Washington pays for medical care
AEI on Facebook
Events Calendar
  • 28
    MON
  • 29
    TUE
  • 30
    WED
  • 31
    THU
  • 01
    FRI
Tuesday, July 29, 2014 | 10:00 a.m. – 12:00 p.m.
Is Medicare's future secure? The 2014 Trustees Report

Please join AEI as the chief actuary for Medicare summarizes the report’s results, followed by a panel discussion of what those spending trends are likely to mean for seniors, taxpayers, the health industry, and federal policy.

Event Registration is Closed
Friday, August 01, 2014 | 10:30 a.m. – 12:00 p.m.
Watergate revisited: The reforms and the reality, 40 years later

Please join us as four of Washington’s most distinguished political observers will revisit the Watergate hearings and discuss reforms that followed.

No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.