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Budget Deficit and Interest Rates: Is There a Link? International Evidence

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  • Correia-Nunes, Jose
  • Stemitsiotis, Loukas
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    Abstract

    This paper addresses the question whether high nominal and real long-term interest rates are associated with larger budget deficits. The authors use a loanable funds model framework that allows the combination of the characteristics of the term-structure, with policy variables, influencing long-term interest rates. The paper brings a different perspective to empirical investigations by using a specific econometric approach that combines rational expectations with sticky prices and slow adjustment. The regression results show that the linkage between large deficits and high interest rates is statistically strong and robust during the 1970-93 period for ten major industrial countries and at the world level. Copyright 1995 by Blackwell Publishing Ltd

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    Bibliographic Info

    Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

    Volume (Year): 57 (1995)
    Issue (Month): 4 (November)
    Pages: 425-49

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    Handle: RePEc:bla:obuest:v:57:y:1995:i:4:p:425-49

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    Cited by:
    1. Daniel Choi & Mark Holmes, 2014. "Budget deficits and real interest rates: a regime-switching reflection on Ricardian Equivalence," Journal of Economics and Finance, Springer, vol. 38(1), pages 71-83, January.
    2. Mª Mar Sánchez, 2002. "Interest-Rate Models For Us And Uk With Mixed Inflationary Expectations. A Comparison With The Rational And The Adaptive Scheme," Working Papers. Serie AD 2002-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    3. Duy, Timothy A. & Thoma, Mark A., 1998. "Modeling and Forecasting Cointegrated Variables: Some Practical Experience," Journal of Economics and Business, Elsevier, vol. 50(3), pages 291-307, May.
    4. Caporale, Guglielmo Maria & Girardi, Alessandro, 2013. "Fiscal spillovers in the Euro area," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 84.e1-84.e1.
    5. Tito B.S. Moreira & Geraldo Silva Souza, 2009. "A Nominal Theory of the Nominal Rate of Interest and the Price Level: Some Empirical Evidence," Economics Bulletin, AccessEcon, vol. 29(4), pages 3120-3125.
    6. Säfvenblad, Patrik, 1998. "The Informational Advantage of Foreign Investors: An Empirical Study of the Swedish Bond Market," Working Paper Series in Economics and Finance 240, Stockholm School of Economics.
    7. Bruneau, C. & De Bandt, O., 1999. "Fiscal Policy in the Transition to Monetary Union: a Structural VAR Model," Working papers 60, Banque de France.
    8. Catherine Mathieu & Jérôme Creel & Henri Sterdyniak & Bruno Ducoudre, 2005. "Doit-on oublier la politique budgétaire? Une analyse critique de la nouvelle théorie anti-keynésienne des finances publiques," Sciences Po publications info:hdl:2441/1769, Sciences Po.
    9. Chakraborty, Lekha, 2012. "Determination of Interest Rate in India: Empirical Evidence on Fiscal Deficit-Interest Links and Financial Crowding Out," Working Papers 12/110, National Institute of Public Finance and Policy.
    10. Bruno Ducoudré, 2005. "Fiscal policy and interest rates," Documents de Travail de l'OFCE 2005-08, Observatoire Francais des Conjonctures Economiques (OFCE).
    11. Krämer, Jörg W., 1996. "Determinants of the expected real long-term interest rates in the G7-countries," Kiel Working Papers 751, Kiel Institute for the World Economy.
    12. Denise Côté & Christopher Graham, 2004. "Convergence of Government Bond Yields in the Euro Zone: The Role of Policy Harmonization," Working Papers 04-23, Bank of Canada.
    13. Jesper Lindé, 2001. "Fiscal policy and interest rates in a small open economy," Finnish Economic Papers, Finnish Economic Association, vol. 14(2), pages 65-83, Autumn.
    14. Caporale, Guglielmo Maria & Williams, Geoffrey, 2002. "Long-term nominal interest rates and domestic fundamentals," Review of Financial Economics, Elsevier, vol. 11(2), pages 119-130.
    15. Lekha S. Chakraborty, 2012. "Interest Rate Determination in India: Empirical Evidence on Fiscal Deficit--Interest Rate Linkages and Financial Crowding Out," Economics Working Paper Archive wp_744, Levy Economics Institute.

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