engen-hubbard-comment-2Apr2004-PostConfRevision

Discussion of Engen and Hubbard “Federal Government Debt and Interest Rates” NBER Macroeconomics Annual Conference April 2004 by Matthew D. Shapiro University of Michigan and NBER April 2, 2004 Revised June 18, 2004 Are cookies fattening? For every 2,850 calories one eats in excess of the steady state caloric requirement for maintaining weight, one gains a pound. Suppose a cookie has 100 calories. So eating a cookie, all other things equal, leads to a weight gain of 0.035 pound, a positive, but small effect on weight. The 0.035 is the marginal effect of a cookie on weight. Engen and Hubbard’s aim in this paper is to estimate a similar parameter, the marginal effect of Federal debt on long-term interest rates. They survey the evidence and present new empirical estimates and theoretical calculations. Based on their analysis, they conclude, according to their preferred metric, that increasing the ratio of Federal debt to GDP by 1 percentage point will increase long-term real interest rates by 0.035 percentage point or 3.5 basis points. Hence, they characterize their results as showing that the marginal effect of Federal debt on long-term interest rates is small, but positive. There is little to quarrel with in this estimate. It is in line with results found in a recent careful study by Thomas Laubach (2003) of the Federal Reserve Board. Nonetheless, the paper does not tell the full story about ...