How Important are Debt and Growth Expectations for Interest Rates?
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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. The results show, consistent with the literature, 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.
Series:
Working Paper No. 2015/094
Subject:
Financial crises Financial services Global financial crisis of 2008-2009 Long term interest rates National accounts Private debt Public debt Yield curve
English
Publication Date:
May 1, 2015
ISBN/ISSN:
9781484358603/1018-5941
Stock No:
WPIEA2015094
Pages:
27
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