IMF Working Papers

The Impact of Debt and Deficits on Long-Term Interest Rates in the US

By Davide Furceri, Carlos Goncalves, Hongchi Li

July 11, 2025

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Davide Furceri, Carlos Goncalves, and Hongchi Li. "The Impact of Debt and Deficits on Long-Term Interest Rates in the US", IMF Working Papers 2025, 142 (2025), accessed July 12, 2025, https://doi.org/10.5089/9798229016964.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We present new evidence on the impact of fiscal variables on long-term interest rates and term premia in the United States. To alleviate endogeneity problems, we follow the seminal methodology by Laubach (2009) and resort to long-term projections of interest rates and fiscal variables. After incorporating an additional 20 years of data into our sample, the estimated effects of debt and deficits on interest rates show little change from Laubach’s findings. However, we show that the link between longterm rates and fiscal variables is not stable over time. It was close to zero during the years of relative fiscal prudence around the turn of the century and it has been increasing since fiscal positions have started to deteriorate markedly.

Subject: Business cycles, Economic growth, Economic recession, Financial services, Fiscal policy, Fiscal stance, Government debt management, Inflation, Long term interest rates, Population and demographics, Population growth, Prices, Public debt, Public financial management (PFM), Real interest rates, Short term interest rates

Keywords: Bonds, Business cycles, Debt, Deficit, Economic recession, Euro Area, Fiscal stance, Global, Global financial crisis of 2008-2009, Government debt management, Inflation, Interest Rate, Long term interest rates, Population growth, Real interest rates, Short term interest rates, Term Premia, United Nations, World

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