IDEAS home Printed from https://ideas.repec.org/p/fip/feddwp/103436.html

The Interest Rate Effects of Government Debt and Deficits: Does Domestic Borrowing Have a Different Impact Than Foreign Borrowing?

Author

Listed:
  • J. Scott Davis
  • Lillian Derr

Abstract

We investigate the relationship between government debt and interest rates. We ask whether the effect of government debt on interest rates depends on whether that debt is financed at home or abroad. We extend the work of previous studies that have estimated the effect of expected government debt or deficits on interest rates, and we add an international dimension by incorporating forecasts of the current account balance or net foreign asset position. We find that an increase in government debt financed from domestic savings has less of an effect on interest rates than an increase in government debt financed by foreign borrowing, and government debt has less of an effect on interest rates in a country that is a net international creditor than one that is a net international debtor.

Suggested Citation

  • J. Scott Davis & Lillian Derr, 2026. "The Interest Rate Effects of Government Debt and Deficits: Does Domestic Borrowing Have a Different Impact Than Foreign Borrowing?," Working Papers 2614, Federal Reserve Bank of Dallas, revised 10 Jul 2026.
    • Handle: RePEc:fip:feddwp:103436
    DOI: 10.24149/wp2614r1
    as

    Download full text from publisher

    File URL: https://www.dallasfed.org/research/papers/2026/wp2614
    Download Restriction: no
    File URL: https://www.dallasfed.org/~/media/documents/research/papers/2026/wp2614.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://www.dallasfed.org/~/media/documents/research/papers/2026/wp2614a.pdf
    File Function: Appendix
    Download Restriction: no
    File URL: https://libkey.io/10.24149/wp2614r1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
    2. Joseph W. Gruber & Steven B. Kamin, 2012. "Fiscal Positions and Government Bond Yields in OECD Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1563-1587, December.
    3. Müller, Karsten & Xu, Chenzi & Lehbib, Mohamed & Chen, Ziliang, 2025. "The Global Macro Database: A New International Macroeconomic Dataset," CEPR Discussion Papers 19937, Centre for Economic Policy Research.
    4. Edward Gamber & John Seliski, 2019. "The Effect of Government Debt on Interest Rates: Working Paper 2019-01," Working Papers 55018, Congressional Budget Office.
    5. Jeffrey Schafer, 2024. "Revisiting the Relationship Between Debt and Long-Term Interest Rates: Working Paper 2024-05," Working Papers 60314, Congressional Budget Office.
    6. Brandao-Marques, Luis & Casiraghi, Marco & Gelos, Gaston & Harrison, Olamide & Kamber, Gunes, 2024. "Is high debt Constraining monetary policy? evidence from inflation expectations," Journal of International Money and Finance, Elsevier, vol. 149(C).
    7. Eric M. Engen & R. Glenn Hubbard, 2005. "Federal Government Debt and Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 83-160, National Bureau of Economic Research, Inc.
    8. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, June.
    9. R. Glenn Hubbard & Eric M. Engen, 2004. "Federal Government Debt and Interest Rates," AEI Economics Working Papers 50018, American Enterprise Institute.
    10. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    11. J. Scott Davis & Lillian Derr, 2025. "Transfer payments, household savings play key roles in growing U.S. deficit," Dallas Fed Economics 102176, Federal Reserve Bank of Dallas.
    12. William G. Gale & Peter R. Orszag, 2004. "Budget Deficits, National Saving, and Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 101-210.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christopher J. Gust & Arsenios Skaperdas, 2024. "Government Debt, Limited Foresight, and Longer-term Interest Rates," Finance and Economics Discussion Series 2024-027, Board of Governors of the Federal Reserve System (U.S.).
    2. Piotr Ciżkowicz & Grzegorz Parosa & Andrzej Rzońca, 2022. "Fiscal tensions and risk premium," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(3), pages 833-896, August.
    3. Giuseppe Grande & Sergio Masciantonio & Andrea Tiseno, 2014. "The interest-rate sensitivity of the demand for sovereign debt. Evidence from OECD countries (1995-2011)," Temi di discussione (Economic working papers) 988, Bank of Italy, Economic Research and International Relations Area.
    4. Gale, William G., 2019. "Fiscal policy with high debt and low interest rates," MPRA Paper 99207, University Library of Munich, Germany.
    5. BOUNADER, Lahcen, 2016. "Is there a crowding-out effect in the Moroccan context ? Evidence from structural VAR Analysis," MPRA Paper 69275, University Library of Munich, Germany.
    6. Suvra Prokash Mondal & Biswajit Maitra, 2022. "Deficits, Debt and Interest Rates in Sri Lanka: Does the Spillover of Foreign Interest Rates Matter?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 16(1), pages 28-48, February.
    7. Laopodis, Nikiforos T., 2009. "Fiscal policy and stock market efficiency: Evidence for the United States," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 633-650, May.
    8. Sinai, Allen, 2006. "Deficits, expected deficits, financial markets, and the economy," The North American Journal of Economics and Finance, Elsevier, vol. 17(1), pages 79-101, March.
    9. Carlos David Ardila-Dueñas & Hernán Rincón-Castro, 2019. "¿Cómo y qué tanto impacta la deuda pública a las tasas de interés de mercado?," Borradores de Economia 1077, Banco de la Republica de Colombia.
    10. Théo METZ, 2024. "New fiscal transparency index and public debt borrowing costs," Working Papers of BETA 2024-50, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    11. Ernest Dautovic, 2017. "The effect of real-time fiscal policy on sovereign interest rates in OECD countries," International Economics and Economic Policy, Springer, vol. 14(1), pages 167-185, January.
    12. Kumhof, Michael & Laxton, Douglas & Leigh, Daniel, 2014. "To starve or not to starve the beast?," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 1-23.
    13. Ansgar Rannenberg, 2019. "Inequality, the risk of secular stagnation and the increase in household deb," Working Paper Research 375, National Bank of Belgium.
    14. Tapsoba, Sampawende J.-A., 2014. "Options and strategies for fiscal consolidation in India," Economic Modelling, Elsevier, vol. 43(C), pages 225-237.
    15. Ansgar Rannenberg & Thomas Theobald, 2022. "Income inequality and the German export surplus," Working Paper Research 424, National Bank of Belgium.
    16. Afonso, António & Martins, Manuel M.F., 2012. "Level, slope, curvature of the sovereign yield curve, and fiscal behaviour," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1789-1807.
    17. Ichiue, Hibiki & Shimizu, Yuhei, 2015. "Determinants of long-term yields: A panel data analysis of major countries," Japan and the World Economy, Elsevier, vol. 34, pages 44-55.
    18. Rannenberg, Ansgar, 2021. "State-dependent fiscal multipliers with preferences over safe assets," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 1023-1040.
    19. Joseph E. Gagnon & Matthew Raskin & Julie Remache & Brian P. Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, vol. 17(May), pages 41-59.
    20. Freedman, Charles & Kumhof, Michael & Laxton, Douglas & Muir, Dirk & Mursula, Susanna, 2010. "Global effects of fiscal stimulus during the crisis," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 506-526, July.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • H6 - Public Economics - - National Budget, Deficit, and Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:feddwp:103436. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amy Chapman (email available below). General contact details of provider: https://edirc.repec.org/data/frbdaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.