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Public Debt Levels and Real Interest Rates: Causal Evidence from Parliamentary Elections

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Abstract

We use close parliamentary elections as natural experiments to estimate the debt sensitivity of interest rates. Relative to an election in which one party barely secures a majority, an election in which no party achieves a majority causes the debt-to-GDP ratio to increase by 17 percentage points, while real interest rates rise by 99 basis points. If elections only impact real rates via debt, our results imply that a one percentage point increase in the debt-to-GDP ratio causes a 5.8 basis point increase in real rates, larger than most previous estimates and suggesting potential reverse causality from rates to debt.

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  • Gabriel Ehrlich & Owen Kay & Aditi Thapar, 2025. "Public Debt Levels and Real Interest Rates: Causal Evidence from Parliamentary Elections," Working Papers 2539, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:102173
    DOI: 10.24149/wp2539
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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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