Deficits, Explicit Debt, Implicit Debt, and Interest Rates: Some Empirical Evidence
AbstractThis study revisits the long-standing issue of the relationship between government borrowing and long-term interest rates through innovations accounting in vector autoregression models. In particular, we consider the dynamic effects of primary deficits and both explicit and implicit debt on long-term interest rates. In addition to the widely used Cholesky decomposition, the emerging method of directed acyclic graphs is also used for the purpose of model identification. We find that federal deficits and explicit and implicit debt all affect the nominal long-term interest rates to varying degrees; although, the effects tend to die out after several years. The evidence assembled here is preliminary because of data availability. Nevertheless, it does suggest that it is important to consider the increasing amount of debt implicit in the government entitlement programs in the future discussion of fiscal discipline.
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Bibliographic InfoArticle provided by Southern Economic Association in its journal Southern Economic Journal.
Volume (Year): 75 (2008)
Issue (Month): 1 (July)
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- H6 - Public Economics - - National Budget, Deficit, and Debt
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