Public Debt, Consumption Growth, and the Slope of the Term Structure

Fisher College of Business Working Paper No. 2018-03-23

Charles A. Dice Center Working Paper No. 2018-23

89 Pages Posted: 14 Dec 2018 Last revised: 2 Nov 2021

See all articles by Thien Tung Nguyen

Thien Tung Nguyen

Federal Reserve Board of Governors

Date Written: October 30, 2021

Abstract

The debt-to-GDP ratio negatively predicts cumulative nominal consumption growth up to a 10-year horizon, resulting from the ratio's ability to forecast lower inflation and real growth. Moreover, the debt-to-GDP ratio is positively associated with yield spreads. I rationalize these facts in a model in which positive shocks to government debt cause lower inflation and growth, making bonds attractive assets. Furthermore, because longer-term bonds are less exposed to current debt shock than are shorter-term bonds, they are better hedges, resulting in high yield spreads in high-debt states. The model highlights the importance of fiscal risk in understanding the Treasury bond market.

Keywords: Government Debt, Fiscal Policy, Term Structure of Interest Rates, Endogenous Growth Risk

JEL Classification: E43, E44, E62, G12, G18, H32

Suggested Citation

Nguyen, Thien Tung, Public Debt, Consumption Growth, and the Slope of the Term Structure (October 30, 2021). Fisher College of Business Working Paper No. 2018-03-23, Charles A. Dice Center Working Paper No. 2018-23, Available at SSRN: https://ssrn.com/abstract=3285197 or http://dx.doi.org/10.2139/ssrn.3285197

Thien Tung Nguyen (Contact Author)

Federal Reserve Board of Governors ( email )

Washington, D.C., DC

HOME PAGE: http://sites.google.com/site/thientungnguyen

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