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Fiscal policy, trigger points and interest rates: Additional evidence from the U.S

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  • Gerhard Reitschuler

    ()

  • Rupert Sendlhofer

    ()

Abstract

We empirically investigate whether the relationship between interest rates and public deficits/debt may be nonlinear for the U.S. Using threshold estimation, we find evidence of level-dependent effects on interest rates, implying a significant effect of projected deficits and debt in the U.S. only if the deficit surpasses approximately 5% of GDP.

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File URL: http://eeecon.uibk.ac.at/wopec2/repec/inn/wpaper/2011-23.pdf
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Bibliographic Info

Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2011-23.

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Length: 31
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:inn:wpaper:2011-23

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Related research

Keywords: Public debt; public deficit; long-term interest rates; nonlinearity; threshold models; Domar model;

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References

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  1. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, MIT Press, vol. 7(4), pages 858-885, 06.
  2. Marco Bassetto & R. Andrew Butters, 2010. "What is the relationship between large deficits and inflation in industrialized countries?," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q III, pages 83-100.
  3. Martin Zagler & Georg Dürnecker, 2003. "Fiscal Policy and Economic Growth," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 17(3), pages 397-418, 07.
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  8. Antonio Afonso, 2010. "Long-term government bond yields and economic forecasts: evidence for the EU," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 17(15), pages 1437-1441.
  9. L. Marattin & S. Salotti, 2010. "The Euro-dividend: public debt and interest rates in the Monetary Union," Working Papers 695, Dipartimento Scienze Economiche, Universita' di Bologna.
  10. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(3), pages 613-652, June.
  11. Zivney, Terry L & Marcus, Richard D, 1989. "The Day the United States Defaulted on Treasury Bills," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 24(3), pages 475-89, August.
  12. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, Econometric Society, vol. 62(6), pages 1383-1414, November.
  13. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  14. Riccardo Faini, 2006. "Fiscal policy and interest rates in Europe," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 21(47), pages 443-489, 07.
  15. Caporale, Guglielmo Maria & Williams, Geoffrey, 2002. "Long-term nominal interest rates and domestic fundamentals," Review of Financial Economics, Elsevier, Elsevier, vol. 11(2), pages 119-130.
  16. Thomas Laubach, 2010. "Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk," NBER Chapters, in: NBER International Seminar on Macroeconomics 2010, pages 7-29 National Bureau of Economic Research, Inc.
  17. Douglas Laxton & Dirk Muir & Michael Kumhof & Susanna Mursula & Charles Freedman, 2009. "Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits," IMF Working Papers 09/255, International Monetary Fund.
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