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A Note on Interest Rates and Structural Federal Budget Deficits

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  • Kitchen, John

Abstract

This paper provides evidence on the response of interest rates to Federal budget deficits. A simple model is presented that incorporates the role of monetary policy in the determination of short-run interest rates and that ascribes the effects of government budget imbalances on the term structure of interest rates to uncertainty about the expected evolution of inflation and real interest rates. Empirical results support the view that the term structure of interest rates is affected by Federal budget deficits, with a significant positive response of intermediate- and long-term interest rates relative to short-term rates in response to budget deficits.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21069.

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Date of creation: Sep 2002
Date of revision: Oct 2002
Handle: RePEc:pra:mprapa:21069

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Keywords: interest rates; deficit; budget;

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References

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  1. Thorbecke, Willem, 1993. "Why deficit news affects interest rates," Journal of Policy Modeling, Elsevier, Elsevier, vol. 15(1), pages 1-11, February.
  2. B. Douglas Bernheim, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316 National Bureau of Economic Research, Inc.
  3. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 31(1), pages 142-90, March.
  4. Evans, Paul, 1987. "Do budget deficits raise nominal interest rates? : Evidence from six countries," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 281-300, September.
  5. Evans, Paul, 1986. "Is the dollar high because of large budget deficits?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 18(3), pages 227-249, November.
  6. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  7. Kitchen, John, 1996. "Domestic and international financial market responses to Federal deficit announcements," Journal of International Money and Finance, Elsevier, Elsevier, vol. 15(2), pages 239-254, April.
  8. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 18(1), pages 1-17, February.
  9. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  10. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 68-87, March.
  11. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "Should the European Central Bank and the Federal Reserve be concerned about fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 333-389.
  12. Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(1), pages 34-58, February.
  13. Wachtel, Paul & Young, John, 1987. "Deficit Announcements and Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 1007-12, December.
  14. Charles L. Evans, 1998. "Real-time Taylor rules and the federal funds futures market," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q III, pages 44-55.
  15. Plosser, Charles I., 1987. "Fiscal policy and the term structure," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 343-367, September.
  16. Douglas W. Elmendorf, 1996. "The effects of deficit-reduction laws on real interest rates," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 96-44, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Chinn, Menzie David & Frankel, Jeffrey A., 2003. "The Euro Area and World Interest Rates," Santa Cruz Department of Economics, Working Paper Series qt2nb2h4zr, Department of Economics, UC Santa Cruz.
  2. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
  3. Kameda, Keigo, 2014. "Budget deficits, government debt, and long-term interest rates in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 32(C), pages 105-124.
  4. Kitchen, John & Chinn, Menzie, 2010. "Financing U.S. debt: Is there enough money in the world – and at what cost?," MPRA Paper 24736, University Library of Munich, Germany.

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