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The Impact of a Persistent Increase in the Budget Deficit on Real Interest Rates

In: Fiscal Policy Shocks and Macroeconomic Growth in South Africa

Author

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  • Eliphas Ndou

    (University of South Africa)

  • Nombulelo Gumata

    (Eldoreigne X3)

Abstract

How does a persistent increase in the budget deficit impact real interest rates? Do high budget deficit regimes propagate the negative effects of inflationary pressures? We find that the real ten-year yield increases in response to a positive shock to the budget deficit while output, investment, and employment growth decline. This implies that positive deficit shocks exert negative effects on the real interest rate which in turn have negative macroeconomic effects. In addition, high and low budget deficit regimes induce asymmetries in the responses of key selected macroeconomic indicators. The counterfactual results indicate that the inflation channel amplifies the impact of the budget deficit shock on real ten-year yields and the business confidence index. These results imply that the inflation environment matters for the impact of positive budget deficit shocks.

Suggested Citation

  • Eliphas Ndou & Nombulelo Gumata, 2023. "The Impact of a Persistent Increase in the Budget Deficit on Real Interest Rates," Springer Books, in: Fiscal Policy Shocks and Macroeconomic Growth in South Africa, chapter 0, pages 149-155, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-37755-6_12
    DOI: 10.1007/978-3-031-37755-6_12
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