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Government Debt, Limited Foresight, and Longer-term Interest Rates

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Abstract

We study the relationship between government debt and interest rates in an environment where financial market participants have limited foresight about the future path of government debt. We show that limited foresight substantially attenuates estimates of the effect of government debt on longer-term yields relative to the benchmark of rational expectations often used in empirical analysis.

Suggested Citation

  • 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.).
    • Handle: RePEc:fip:fedgfe:2024-27
    DOI: 10.17016/FEDS.2024.027
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    More about this item

    Keywords

    Government debt; Longer-term interest rates; Term premiums; Limited foresight;
    All these keywords.

    JEL classification:

    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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