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How sensitive are interest rates to higher federal debt?
The U.S. faces a historically high federal debt-to-GDP ratio, a measure of debt relative to economic output. But how sensitive are interest rates to higher debt?
Working Paper
Subcontracting in Federal Spending: Micro and Macro Implications
This paper studies the critical but underexplored role of subcontracting in shaping the spatial and firm-level effects of federal government spending, introducing a new channel through which fiscal shocks propagate. Using newly available data on defense subcontracts merged with firm-level data, we document that a substantial share of spending is reallocated via subcontracts across regions beyond what is implied by the location of prime contracts. Firm-to-firm flows further show that subcontracting redirects spending toward large, goods-producing firms. We develop an empirical strategy that ...
Working Paper
Subcontracting in Federal Spending: Micro and Macro Implications
This paper studies the critical but underexplored role of subcontracting in shaping the spatial and firm-level effects of federal government spending. Leveraging newly available data on defense subcontract awards since 2011, linked with NETS establishment-level data, we examine prime–subcontractor relationships across counties, industries and time. We document three stylized facts: (1) subcontracting leads to widespread geographic relocation of federal dollars; (2) it reallocates spending across sectors, notably from service-sector primes to manufacturing subcontractors; and (3) large firms ...
Working Paper
Revisiting the Interest Rate Effects of Federal Debt
This paper revisits the relationship between federal debt and interest rates, which is a key input for assessments of fiscal sustainability. Estimating this relationship is challenging due to confounding effects from business cycle dynamics and changes in monetary policy. A common approach is to regress long-term forward interest rates on long-term projections of federal debt. We show that issues regarding nonstationarity have become far more pronounced over the last 20 years, significantly biasing the recent estimates based on this methodology. Estimating the model in first differences ...
Working Paper
Revisiting the Interest Rate Effects of Federal Debt
This paper revisits the relationship between federal debt and interest rates. A common approach in the literature is to regress an expected interest rate on a projection of federal debt. We show that issues related to nonstationarity have become more pronounced over the last 20 years, raising significant concern about the reliability of estimates from this model. We argue that estimating the model in first differences rather than in levels addresses these concerns. Our preferred specification indicates that a 1 percentage point increase in the debt-to-GDP ratio raises the 5-year-ahead, 5-year ...
Journal Article
Higher Treasury Supply Is Likely to Put Upward Pressure on Interest Rates
U.S. government debt has been increasing over the past two decades and is expected to continue to increase. The higher supply of Treasury securities issued to fund this debt is likely to put upward pressure on interest rates. This pressure, in turn, could increase both term premiums and the long-run neutral rate.
Journal Article
Implementation Delays in Pension Retrenchment Reforms
As the global population ages, public spending on pensions has increased dramatically. As a result, policymakers have increasingly focused on pension retrenchment reforms to keep their systems solvent. These reforms usually involve long implementation delays to provide retirees time to adjust their retirement plans. However, long implementation delays also slow the rollback of governments? pension spending, potentially raising long-run fiscal risks. {{p}} {{p}} Huixin Bi, Kevin Hunt, and Sarah Zubairy collect a new data set that tracks implementation delays during pension retrenchment reforms ...
Working Paper
Treasury Supply Shocks: Propagation Through Debt Expansion and Maturity Adjustment
Historically high debt-to-GDP levels in the United States have raised concerns about future financial market stability and fiscal sustainability. We use high-frequency data and consider Treasury futures price changes within narrow windows around auction announcements to identify two distinct Treasury supply shocks: debt expansion shocks that capture changes in the level of public debt, and maturity extension shocks that reflect changes in the maturity structure. We find that debt expansion shocks raise yields across the curve by increasing term premia, leading to tighter financial conditions. ...
Working Paper
Public Pension Reforms and Fiscal Foresight: Narrative Evidence and Aggregate Implications
We explore the evolution of pension policy across countries and investigate the macroeconomic effects of pension structural reforms in recent decades, in particular those with implementation delays. We first document chronological changes in pension policy for 10 OECD countries between 1962 and 2017. The new data set shows that pension systems rapidly expanded between the 1960s and 1980s, followed by a wave of retrenchments since the 1990s. Structural pension reforms, which are motivated by long-run fiscal sustainability concerns, often come with significant implementation delays. We find ...
Journal Article
A primer on the empirical identification of government spending shocks
The empirical literature on the effects of government spending shocks lacks unanimity about the responses of consumption and wages. Proponents of shocks identified by structural vector auto-regressions (VARs) find results consistent with New Keynesian models: consumption and wages increase. On the other hand, proponents of the narrative approach find results consistent with neoclassical models: consumption and wages decrease. This paper reviews these two identifications and confirms their differences by using standard economic series. It also uses alternative measures of government spending, ...