Working Paper

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

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.

Keywords: Government debt; Longer-term interest rates; Term premiums; Limited foresight;

JEL Classification: E70; E40; G10;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2024-05-03

Number: 2024-027