Debt elastic interest rate. In this model, domestic agents are assumed to face an interest rate that is increasing in the country’s net foreign debt. In this analysis, we use a reduced-form regression to estimate the relationship between projected federal debt and expected long-term interest rates. The first variant estimates the DEIR parameter, while the second fixes it to 0. However, in this case an increase in debt raises the cost of intertemporal trade, inducing consumption response to ameliorate. Our results suggest that the average long-run effect of debt on interest rates ranges from about 2 to 3 basis points for each increase of 1 percentage point in debt as a percentage of GDP. Jul 11, 2025 · After incorporating an additional 20 years of data into our sample, the estimated effects of debt and deficits on interest rates show little change from Laubach’s findings. . The first variant estimates the DEIR parameter, while the second fixes it 2. I find substantial qualitative and quantitative differences between these methods in a two-country framework, in contrast to the results of Schmitt-Grohé and Uribe (2003). Treasury Securities datasets to explore and download this data. A common approach in the literature is to regress an expected interest rate on a projection of federal debt. This paper revisits the relationship between federal debt and interest rates. This stationarity inducing technique has been used, among others, in recent papers by Senhadji (1994), Mendoza and Uribe (2000), and Schmitt-Grohé and Uribe (2001). However, we show that the link between longterm rates and fiscal variables is not stable over time. Solid line: Endogenous discount factor model; Squares: Endogenous discount factor model without internalization; Dashed line: Debt-elastic interest rate model; Dash–dotted line: Portfolio adjustment cost model; Dotted line: complete asset markets model; Circles: Model without stationarity inducing elements. Nov 1, 2024 · Using long-run data from 17 small open economies (SOEs), we compare two variants of a workhorse SOE real business cycle model featuring a debt-elastic interest rate (DEIR), a measure of financial frictions. Visit the Interest Expense on the Debt Outstanding and Average Interest Rates on U. To see why this device induces Nov 1, 2024 · The trade-off between trend shocks and financial frictions, as captured by a debt-elastic interest rate (DEIR), arises because the effects of a positive trend shock are amplified through an increase in foreign debt issuance when the DEIR is low, raising consumption more than output, in line with the permanent income hypothesis. Oct 1, 2003 · In Section 3 we study a model with a debt-elastic interest-rate premium. Apr 1, 2015 · Conversely, in debt friction models as the “debt elastic interest rate” model, a technology shock also increases consumption and debt. 3. 8 Motivation behind the choice of ‘closing’method EDEIR Schmitt-Grohe and Uribe’s (2016) main argument is that all stationarity induc- ing features generate virtually identical second moment predictions and impulse response functions to a technological shock. Several methods have been proposed to obtain stationarity in open economy models. 001, effectively abstracting from financial frictions. The interest expense reflects the sum of all interest paid on the debt for each fiscal year or through the latest month of the latest fiscal year. Using long-run data from 17 small open economies (SOEs), we compare two variants of a workhorse SOE real business cycle model featuring a debt-elastic interest rate (DEIR), a measure of financial frictions. S. Jun 11, 2024 · We study how financial frictions affect the importance of trend productivity shocks for macroeconomic fluctuations. In this chapter, we ask more questions about the ability of that model to explain observed business cycles. 3 Closing the Economy External Debt Elastic Interest Rate 2. qjagap lminkg voks efra bguo esuz wmdck oqyp epls vvtkp