Fiscal Policy, Trigger Points and Interest Rates: Additional Evidence From the U.S.

Abstract

We empirically investigate whether the relationship between interest rates and public deficits/debt may be nonlinear for the U.S. Using threshold estimation, we find evidence of level-dependent effects on interest rates, implying a significant effect of projected deficits and debt in the U.S. only if the deficit surpasses approximately 5% of GDP.

Keywords: public debt, public deficit, long-term interest rates, nonlinearity, threshold models, Domar model

JEL Classification: E43, E62, H62