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How Important are Debt and Growth Expectations for Interest Rates?

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  • Mr. Sohrab Rafiq

Abstract

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.

Suggested Citation

  • Mr. Sohrab Rafiq, 2015. "How Important are Debt and Growth Expectations for Interest Rates?," IMF Working Papers 2015/094, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2015/094
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    References listed on IDEAS

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    Cited by:

    1. Sérgio C. Lagoa & Emanuel R. Leão & Diptes P. Bhimjee, 2022. "Dynamics of the public-debt-to-gdp ratio: can it explain the risk premium of treasury bonds?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(4), pages 1089-1122, November.

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