How Important are Debt and Growth Expectations for Interest Rates?

This paper uses a dataset on private-sector risk aversion as well as expectations of long-rungrowth and debt to explain trends in implied forward rates on government bonds in the G-7countries. The results show, consistent with the literature, that a one-percent rise in the long-runprojected debt-to-GDP ratio causes an increase in bond yields of a relatively modest 1-to-6 basispoints. Shocks to growth expectations and risk aversion have been comparatively moresuccessful in explaining the behavior of long-term rates. The findings imply that growth policiesrather than long-run projections of fiscal outcomes may be more important in helping influencelong-term borrowing costs.
Publication date: May 2015
ISBN: 9781484358603
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Topics covered in this book

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Economics- Macroeconomics , Economics / General , International - Economics , time-variation , debt , interest , interest rates , forward rates , private sector debt , Monetary Policy (Targets , Instruments , and Effects) , Open Economy Macroeconomics

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