Do markets care enough about deficit to raise future cost of capital? Non-linear deficitinterest rate relationship in the U.S. economy

Rakshit, Atanu2016-04-262016-04-262015-11-30Rakshit, 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=2697057http://nur.nu.edu.kz/handle/123456789/1439This 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.enAttribution-NonCommercial-ShareAlike 3.0 United Statesdeficitsinterest rateshresholdResearch Subject Categories::SOCIAL SCIENCES::Business and economicsDo markets care enough about deficit to raise future cost of capital? Non-linear deficitinterest rate relationship in the U.S. economyArticle