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Government Debt and the Long-Term Interest Rate: Application of an Extended Open-Economy Loanable Funds Model to Poland

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  • Yu Hsing

    (Southeastern Louisiana University, USA)

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    Abstract

    This paper examines the behavior of the long-term interest rate in Poland based on a sample during 2001.Q1–2009.Q1. Both the demand for and supply of loanable funds are considered. Extending the openeconomy loanable funds model, this paper finds thatmore government debt as a percent of gdp leads to a higher long-term interest rate in Poland and that a higher real Treasury bill rate, more percent change in real GDP, a higher expected inflation rate, a higher world long-term interest rate, and depreciation of the zloty would increase the long-term interest rate in Poland. In the standard open-economy loanable funds model including the net capital inflow, the coefficient of the net capital inflow is positive and insignificant at the 10% level. Hence, the incorporation of the world interest rate and the nominal effective exchange rate in the model may better capture the behavior of the long-term interest rate in Poland.

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    File URL: http://www.fm-kp.si/zalozba/ISSN/1581-6311/8_227-237.pdf
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    Bibliographic Info

    Article provided by University of Primorska, Faculty of Management Koper in its journal Managing Global Transitions.

    Volume (Year): 8 (2010)
    Issue (Month): 3 ()
    Pages: 227-237

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    Handle: RePEc:mgt:youmgt:v:8:y:2010:i:3:p:227-237

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    Related research

    Keywords: loanable funds model; government debt; long-term interest rates; expected inflation rates; nominal effective exchange rates;

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    1. De Santis, Roberto A. & Lührmann, Melanie, 2009. "On the determinants of net international portfolio flows: A global perspective," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 880-901, September.
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