Research Department Working Papers
Public Debt Levels and Real Interest Rates: Causal Evidence from Parliamentary Elections
No. 2539
Abstract: We use close parliamentary elections as natural experiments to estimate the debt sensitivity of interest rates. Relative to an election in which one party barely secures a majority, an election in which no party achieves a majority causes the debt-to-GDP ratio to increase by 17 percentage points, while real interest rates rise by 99 basis points. If elections only impact real rates via debt, our results imply that a one percentage point increase in the debt-to-GDP ratio causes a 5.8 basis point increase in real rates, larger than most previous estimates and suggesting potential reverse causality from rates to debt.
DOI: https://doi.org/10.24149/wp2539