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Fiscal Implications of Interest Rate Normalization in the United States

Author

Listed:
  • Huixin Bi
  • Ms. Wenyi Shen
  • Susan Yang Shu-Chun

Abstract

This paper studies the main channels through which interest rate normalization has fiscal implications in the United States. While unexpected inflation reduces the real value of government liabilities, a rising policy rate increases government financing needs because of higher interest payments and lower real bond prices. After an initial decline, the real government debt burden rises even with higher tax revenues in an expansion. Given the current net debt-to-GDP ratio at around 80 percent, interest rate normalization leads to a negligible increase in the sovereign default risk of the U.S. federal government, despite a much higher federal debt-to-GDP ratio than the post-war historical average.

Suggested Citation

  • Huixin Bi & Ms. Wenyi Shen & Susan Yang Shu-Chun, 2019. "Fiscal Implications of Interest Rate Normalization in the United States," IMF Working Papers 2019/090, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/090
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    Cited by:

    1. Fotiou, Alexandra & Shen, Wenyi & Yang, Shu-Chun S., 2020. "The fiscal state-dependent effects of capital income tax cuts," Journal of Economic Dynamics and Control, Elsevier, vol. 117(C).
    2. Mao, Ruoyun & Shen, Wenyi & Yang, Shu-Chun S., 2024. "Can passive monetary policy decrease the debt burden?," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).
    3. Guoqiang Ma & Yiniu Cui, 2025. "An Analysis of the Sustainability Issues of U.S. Treasury Bonds—A Study Based on the Vector Error Correction Model and Trend Forecasting," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 16(1), pages 713-738, March.
    4. Mao, Ruoyun & Shen, Wenyi & Yang, Shu-Chun S., 2023. "Uncertain policy regimes and government spending effects," European Economic Review, Elsevier, vol. 152(C).
    5. Huixin Bi & Wenyi Shen & Shu-Chun S. Yang, 2020. "U.S. Federal Debt Has Increased, but Appears Sustainable for Now," Economic Bulletin, Federal Reserve Bank of Kansas City, pages 1-4, November.
    6. Khwazi Magubane & Jacques de Jongh & Precious Mncayi-Makhanya & Jabulile Makhalima & Phindile Maziya & Boingotlo Wesi, 2024. "Does financial stability spur or retard output and price stability in South Africa?," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 13(9), pages 138-156, December.

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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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