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Public Debt, Consumption Growth, and the Slope of the Term Structure

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  • Thien T Nguyen

Abstract

The debt-to-GDP ratio negatively predicts cumulative nominal consumption growth up to a 10-year horizon, resulting from the ratio’s ability to forecast lower inflation and real growth. Moreover, the debt-to-GDP ratio is positively associated with yield spreads. I rationalize these facts in a model in which positive shocks to government debt cause lower inflation and growth, making bonds attractive assets. Furthermore, because longer-term bonds are less exposed to current debt shock than are shorter-term bonds, they are better hedges, resulting in high yield spreads in high-debt states. The model highlights the importance of fiscal risk in understanding the Treasury bond market.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Thien T Nguyen, 2022. "Public Debt, Consumption Growth, and the Slope of the Term Structure," The Review of Financial Studies, Society for Financial Studies, vol. 35(8), pages 3742-3776.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:8:p:3742-3776.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab123
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    Citations

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    Cited by:

    1. Lengyel, Andras, 2026. "Government bond issuance surprises and the term structure of interest rates in the UK," Journal of Banking & Finance, Elsevier, vol. 189(C).
    2. Huynh, Nhan & Phan, Hoa & Paquette, Kyle & Thi Thu Vu, Phuong, 2026. "Sovereign credit ratings, fiscal burden and corporate investment policies: An international evidence," Research in International Business and Finance, Elsevier, vol. 82(C).
    3. Zhang, Tao & Tang, Ke & Liu, Taoxiong & Jiang, Tingfeng, 2025. "High frequency online inflation and term structure of interest rates: Evidence from China," Journal of Empirical Finance, Elsevier, vol. 83(C).
    4. Liu, Yang, 2023. "Government debt and risk premia," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 18-34.
    5. Bhatia, Vaneet & Pareek, Bhuvanesh & Das, Debojyoti, 2024. "Uncertainty of fiscal policy and corporate leverage decisions," Economics Letters, Elsevier, vol. 243(C).
    6. Taisuke Nakata & Hiroatsu Tanaka, 2026. "Equilibrium Yield Curves and the Interest Rate Lower Bound"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 62, November.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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