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Does More Government Deficit Lead to a Higher Long-term Interest Rate? Application of an Extended Loanable Funds Model to Estonia

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  • Yu Hsing

    ()
    (Department of Business Administration & Finance, College of Business, Southeastern Louisiana University, Hammond, LA, USA)

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    Abstract

    Applying and extending the open-economy loanable funds model, this article shows that more government borrowing or debt as a percent of GDP leads to a higher government bond yield, that a higher real money market rate, a higher expected inflation rate, a higher EU government bond yield, or depreciation of the Estonian kroon (EEK) would increase the Estonian government bond yield, and that the negative coefficient of the percent change in real GDP has an unexpected sign. When the conventional closed-economy or openeconomy loanable funds model is considered, the article finds that more government borrowing as a percent of GDP does not result in a higher government bond yield, that the positive coefficients of the real money market rate, the growth rate of real GDP, and the expected inflation are significant at the 1%, 5% or 10% level, and that the negative coefficient of the ratio of the net capital inflow to GDP in the conventional open-economy loanable funds model is significant at the 1% level.

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    Bibliographic Info

    Article provided by Academy of Economic Studies - Bucharest, Romania in its journal The AMFITEATRU ECONOMIC journal.

    Volume (Year): 12 (2010)
    Issue (Month): 28 (June)
    Pages: 650-659

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    Handle: RePEc:aes:amfeco:v:12:y:2010:i:28:p:650-659

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    Keywords: government deficits; long-term interest rates; loanable funds model; expected inflation; world interest rates; exchange rates;

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    1. De Santis, Roberto A. & L├╝hrmann, Melanie, 2009. "On the determinants of net international portfolio flows: A global perspective," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(5), pages 880-901, September.
    2. Stephen M. Miller & Frank S. Russek, 1991. "The Temporal Causality Between Fiscal Deficits And Interest Rates," Contemporary Economic Policy, Western Economic Association International, Western Economic Association International, vol. 9(3), pages 12-23, 07.
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