Board of Governors of the Federal Reserve System
05/26/2026 | Press release | Distributed by Public on 05/26/2026 12:55
The Causal Effect of Debt on Interest Rates
May 2026
The Causal Effect of Debt on Interest Rates
Abhik Bhatt, Anthony M. Diercks, Benjamin Eyal, and Arsenios Skaperdas
Abstract:
This paper uses a natural experiment to measure the causal effect of an expected debt-financed fiscal stimulus on interest rates. We find that a 1 percentage point increase in the expected US debt-to-GDP ratio leads to an increase of about 1-2 basis points in the longer-run neutral rate (r∗) and of about 2-3 basis points in the 10-year Treasury term premium. Our results validate estimates from a common time-series approach that regresses long-term forward interest rates on long-term projections of government debt, where the exclusion restriction does not apply.
Keywords: government debt, Treasury yields, r∗, term premiums, and fiscal sustainability.
DOI: https://doi.org/10.17016/FEDS.2026.031
PDF: Full Paper
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