Interest Rate Risk and Other Determinants of Post-WWII US Government Debt/GDP Dynamics

Abstract

This paper uses a sequence of government budget constraints to motivate estimates of returns on the US Federal government debt. Our estimates differ conceptually and quantitatively from the interest payments reported by the US government. We use our estimates to account for contributions to the evolution of the debt-GDP ratio made by inflation, growth, and nominal returns paid on debts of different maturities. (JEL E23, E31, E43, G12, H63)

Inflating Away the Public Debt? An Empirical Assessment

“…We build on Hall and Sargent (2011) and significantly extend their work, to a finer distribution of maturities, to consider di↵erent claimholders, and to use more sources of data.…”

“…It is often said that higher average inflation comes with more variable inflation, 19 Again to be clear, we are shifting the risk-neutral distribution of inflation, not the actual inflation target of the central bank. The link between the two depends both on the e↵ectiveness of central bank policy as well as on changes in private assessments of risk.…”

A History of U.S. Debt Limits

“…9 For the period after 1945, Hall and Sargent (2011) present measures of the marketable U.S. Treasury marked to market and in terms of face value. We have extended these series back to 1776.…”

“…An instance of the government budget constraint appearing in macroeconomic models (for example equation (3) of Hall and Sargent (2011)…”

A New Way to Quantify the Effect of Uncertainty

“…Parker and Preston (2005) use the Euler equation to decompose consumption growth into a forecast error, the real interest rate, a measure of preferences, and a precautionary saving channel. Chung and Leeper (2007), Hall and Sargent (2011), Berndt et al (2012), and Mason and Jayadev (2014) all use the government budget constraint to determine the key drivers of government debt.…”