How Important are Debt and Growth Expectations for Interest Rates?

May 1, 2015

Preview Citation

Format: Chicago

Sohrab Rafiq. How Important are Debt and Growth Expectations for Interest Rates?, (USA: International Monetary Fund, 2015) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Financial crises, Financial services, Global financial crisis of 2008-2009, Long term interest rates, National accounts, Private debt, Public debt, Yield curve

Keywords: Debt expectation, Debt expectation shock, Economic growth, Expectation relationship, Expectations, Expectations-interest rate model, Global, Global financial crisis of 2008-2009, Growth expectation, Interest rate movement, Long term interest rates, Private debt, Public debt, Time-variation, WP, Yield curve

Publication Details

Pages:

27
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 2015/094
Stock No:

WPIEA2015094
ISBN:

9781484358603
ISSN:

1018-5941

FACTSHEETS

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers