Date of Award
Spring 3-2-2026
Document Type
Honors Thesis
Department/Major
Economics
Additional Department
Finance
First Advisor
Michael Allgrunn
Second Advisor
Robert Winslow
Third Advisor
Adrian Tippit
Keywords
budget deficits, demographic aging, real interest rates, crowding out, financial globalization, public finance, fixed income, bond market
Abstract
This thesis examines how U.S. federal budget deficits and demographic aging relate to long-term U.S. real interest rates, and how global financial conditions shape that relationship over time. Using annual data from 1960 to 2023, I construct real 10-year Treasury rates by subtracting CPI inflation from 10-year Treasury yields, measure fiscal deficits as a share of GDP, and measure demographic aging with the old-age dependency ratio. I estimate OLS regressions with an interaction term between deficits and aging to test whether the association between deficits and real rates varies with demographic structure. To account for structural differences in the U.S. economy and financial globalization, I report full-sample estimates and compare results from 1960-1990 and 1991-2023. Later-period models also include a proxy for foreign real rates and net capital inflows. Overall, the results suggest that demographic change and financial globalization jointly shape how deficit financing affects the U.S. bond market.
Recommended Citation
Test, Tyson C., "DOES DEMOGRAPHIC AGING AND FINANCIAL GLOBALIZATION MODERATE CROWDING OUT? FEDERAL DEFICITS AND U.S. LONG-TERM REAL INTEREST RATES." (2026). Honors Thesis. 411.
https://red.library.usd.edu/honors-thesis/411
Comments
Shows that the deficit–interest rate relationship is more conditional than standard models assume, with demographic aging and global capital flows significantly shaping the policy environment in which fiscal and monetary decisions are made.