Do markets care enough about deficit to raise future cost of capital? Non-linear deficitinterest rate relationship in the U.S. economy
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Date
2015-11-30
Authors
Rakshit, Atanu
Journal Title
Journal ISSN
Volume Title
Publisher
Social Science Research Network (SSRN)
Abstract
This paper finds strong evidence of non-linear impact of long-horizon expected government
deficits, measured by CBO projections, on expected future long-term interest rates for the US economy. The impact of a shock to expectations (“news shock”) in a regime where the expected deficit/GDP ratio is above 1.8 % (the estimated threshold value) increases future nominal interest rates by 29-30 basis point, and future real rates by 12-18 basis points. When expected deficit/GDP ratio is below 1.8 %, a surprise increase in expectations of deficit has no statistically significant impact on future interest rates.
Description
Keywords
deficits, interest rates, hreshold, Research Subject Categories::SOCIAL SCIENCES::Business and economics
Citation
Rakshit, Atanu, Do Markets Care Enough about Deficit to Raise Future Cost of Capital? Non-Linear Deficit-Interest Rate Relationship in the U.S. Economy (November 30, 2015). Available at SSRN: http://ssrn.com/abstract=2697057