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. This paper shows 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. The authors argue that estimating the model in first differences rather than in levels addresses these concerns.