Measuring Interest Payments on the U . S . Federal Debt ∗

The U.S. government routinely misstates interest costs on government debt. These misstatements occur partly because the government fails to account properly for the real capital losses government creditors experience during inflationary periods.1 In addition, the government imperfectly measures the fluctuations in returns to its creditors from changes in interest rates and the maturity composition of the debt. When investors compute the real return on an equity or debt investment, they take into account dividend and coupon payments, the change in price of the stock or bond, and the effect of inflation on the general price level. So should the government in accounting for its interest costs to the public. In this paper we update and extend calculations in Hall and Sargent (1997) that estimate the government’s true real interest costs.2 By manipulating the government’s period-by-period budget constraint, we identify the interest cost component from the stock of outstanding government obligations for the post-World War II period. We then decompose these costs to uncover the anticipated and unanticipated interest expenses. These updates are of interest in part because of the introduction of inflation-protected Treasury securities (TIPS) in late 1990s. While all types of debt allow the government to smooth taxes through time, debt denominated in nominal dollars ∗We thank Francisco Barillas, Christian Grewell, and Leandro Nascimento for careful and diligent research assistance. †Department of Economics, Brandeis University, 415 South Street, Waltham, MA 02454-9110; phone: (781) 736-2242; e-mail: [email protected] ‡Department of Economics, New York University, 19 W. Fourth Street, New York, NY 10012-1119; phone: (212) 998-3548; e-mail: [email protected] See, for example, Olivier Blanchard and Jeffrey Sachs, “There is No Significant Budget Deficit”, New York Times, March 6, 1981, p. A26. Also see Sargent(1993), Hall and Krieger (2000), and Sims (2001) for similar calculations.