Deficits and long-term interest rates: an empirical note
AbstractThis note examines whether long-term nominal interest rates are cointegrated with budget deficits over the period 1959 to 1990. A key finding of this note is that long-term rates are cointegrated with deficits if a one-year ahead inflation forecast series is used to measure long-term expected inflation. However, the evidence favoring cointegration between deficits and interest rates weakens and almost disappears when inflation forecasts over longer horizons (2 to 4 years) are used. This result indicates that a one-year ahead inflation forecast series does not adequately measure long-term expected inflation. Hence, the link found between deficits and long-term rates using one-year inflation forecast series is spurious.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 92-02.
Date of creation: 1992
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Sargent, Thomas J, 1969. "Commodity Price Expectations and the Interest Rate," The Quarterly Journal of Economics, MIT Press, vol. 83(1), pages 127-40, February.
- James H. Stock & Mark W. Watson, 1991.
"A simple estimator of cointegrating vectors in higher order integrated systems,"
Working Paper Series, Macroeconomic Issues
91-3, Federal Reserve Bank of Chicago.
- Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
- Plosser, Charles I., 1982. "Government financing decisions and asset returns," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 325-352.
- Jean-Paul Fitoussi & Francesco Saraceno, 2008.
"Fiscal Discipline as a Social Norm: The European Stability Pact,"
Journal of Public Economic Theory,
Association for Public Economic Theory, vol. 10(6), pages 1143-1168, December.
- Fitoussi, Jean-Paul & Saraceno, Francesco, 2008. "Fiscal Discipline as a Social Norm: The European Stability Pact," Open Access publications from Sciences Po info:hdl:2441/9909, Sciences Po.
- Jean-Paul Fitoussi & Francesco Saraceno, 2007. "Fiscal Discipline as a Social Norm: The European Stability Pact," Documents de Travail de l'OFCE 2007-22, Observatoire Francais des Conjonctures Economiques (OFCE).
- Bruno Ducoudré, 2005. "Fiscal policy and interest rates," Documents de Travail de l'OFCE 2005-08, Observatoire Francais des Conjonctures Economiques (OFCE).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.