The Impact of Government Debt on Interest Rates

The Impact of Government Debt on Interest RatesĀ 

The portfolio crowding out model relies upon money demand depending upon wealth. The model implies, ceteris paribus, that increasing government debt results in higher interest rates on government debt. In addition, debt sustainability concerns can lead to increased sensitivity of government bond yields to the accumulation of debt. Your paper should examine some or several of the following questions:

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  • What is the cross country evidence in favor of higher government debt resulting in higher interest rates?
  • Should expected debt matter as well as current debt?
  • Are there other factors besides debt that should matter to debt yields? What are they?

A suggested background paper/source: Kitchen and Chinn paper, as well as http://dss.ucsd.edu/~jhamilto/USMPF13_final.pdf . This paper topic is amenable to empirical work.

 

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