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Does more government deficit raise the interest rate? Application of extended loanable funds model to Slovenia

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  • Yu Hsing

    ()
    (Southeastern Louisiana University, College of Business, USA)

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    Abstract

    Extending the open-economy loanable funds model, this paper finds that more government deficit as a percentage of GDP does not lead to a higher government bond yield. In addition, a higher real Treasury bill rate, a higher expected inflation rate, a higher EU government bond yield, or an expected depreciation of the euro against the U.S. dollar would increase Slovenia’s long-term interest rate. The negative coefficient of the percentage change in real GDP is insignificant at the 10% level. Applying the standard closed-economy or open-economy loanable funds model without including the world interest rate and the expected exchange rate, we find similar conclusions except that the positive coefficient of the ratio of the net capital inflow to GDP has a wrong sign and is insignificant at the 10% level.

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    Bibliographic Info

    Article provided by University of Rijeka, Faculty of Economics in its journal Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics.

    Volume (Year): 27 (2009)
    Issue (Month): 2 ()
    Pages: 349-361

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    Handle: RePEc:rfe:zbefri:v:27:y:2009:i:2:p:349-361

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    Related research

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

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    1. Robert J. Barro, 1986. "Government Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom, 1701-1918," NBER Working Papers 2005, National Bureau of Economic Research, Inc.
    2. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
    3. Cebula, Richard J & Belton, Willie J, 1993. "Government Budget Deficits and Interest Rates in the United States: Evidence for Closed and Open Systems Put into Perspective, 1955-1989," Public Finance = Finances publiques, , vol. 48(2), pages 188-209.
    4. Aschauer, David Alan, 1989. "Does public capital crowd out private capital?," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 171-188, September.
    5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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