Deficit-related explanations for the US interest rate conundrum
Abstract
This study offers two potential explanations related to the United States federal budget deficit for the recent interest-rate puzzle in the USA where long-term rates have fallen while short-term rates have risen. A VAR quantifies the relationships between real deficits, real GDP growth rates and ex ante real long-term rates. Impulse-response functions show the assumed time-invariant responses of real GDP and long-term real interest rates to a one-standard-deviation increase in the real deficit, providing some support for the crowding out theory but possibly also the crowding in theory in the short term. Findings include that expectations of future deficits could impact real interest rates today. This study notes that the interest-rate impact of expected changes in deficits is unclear because the changes in rates due to changes in (1) federal borrowing and (2) forecasted GDP growth would be in opposite directions, assuming that crowding out occurs at some point. Thus, it is not clear whether reductions in long-term rates imply that people expect larger or smaller budget deficits in the future.Download Info
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Bibliographic Info
Article provided by Taylor and Francis Journals in its journal Applied Economics Letters.
Volume (Year): 14 (2007)
Issue (Month): 4 ()
Pages: 261-265
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