Title page

Contents

Abstract 2

Introduction 4

Reviewing the Literature on the DSIR 6

When and Where Does CBO Use the DSIR? 10

CBO's Baseline Economic Projections 11

CBO's Fiscal Policy Analyses 12

Sensitivity of CBO's Interest Rate Projections to Changes in the DSIR Parameter 12

Why Does CBO Estimate the DSIR Parameter Empirically? 14

Empirical Estimation of the DSIR Parameter 15

Empirical Specification 15

Data 17

Baseline Results 22

Recursive Estimation 23

Testing for Breaks in the Empirical Relationship 24

Conclusion 25

References Cited 27

Appendix A: Using Deficits as the Explanatory Variable of Interest 29

Appendix B: Using Projections of Federal Reserve and Foreign Holdings of U.S. Treasury Securities 31

Table 1. Debt Sensitivity of 10-Year Interest Rate Empirical Results 22

Figure 1. Theoretical Estimates of the Debt Sensitivity of Interest Rates 9

Figure 2. Projected Interest Rates, 1976-2023 18

Figure 3. Projected Debt-to-GDP Ratio, 1976-2023 19

Figure 4. U.S. Treasury Debt Holdings by Entity, 1976-2022, as a Percentage of Nominal GDP 20

Figure 5. Foreign Holdings, 1976-2023, as a Percentage of GDP 21

Figure 6. Recursive Regression Analysis of the Debt Sensitivity of Interest Rates Parameter 24

Table A1. Deficit Sensitivity of 10-Year Interest Rate Models 30

Table B1. Trimmed Models, January 2011-February 2023 33

Figure B1. Federal Reserve Balance Sheet and CBO Projections, 2011-2023, as a Percentage of GDP 32