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An Empirical Investigation into the Impact of U.S. Federal Government Budget Deficits on the Real Interest Rate Yield on Intermediate-term Treasury Debt Issues, 1972-2012


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  • Cebula, Richard


The existence of large federal budget deficits in the U.S., especially in recent years, raises the specter of concern regarding their potential effects on real interest rates (as well as economic growth and capital formation). This study provides current and new empirical evidence on the impact of the federal budget deficit on the real interest rate yields on intermediate-term debt issues of the U.S. Treasury, represented herein by the ex post real interest rate yields on three-year Treasury notes and seven-year Treasury notes, two interest rate measures that have received essentially no attention in the economics and finance literature in recent years. The study is couched within a loanable funds model that includes two ex post real interest rate yields, the monetary base as a percent of GDP, the change in per capita real GDP, net financial capital inflows as a percent of GDP, and the budget deficit as a percent of GDP. This study uses annual data for the study period 1972-2012, a time period that includes “quantitative easing” monetary policies by the Federal Reserve. Two-stage least squares estimations reveal that the federal budget deficit, expressed as a percent of GDP, has exercised a positive and statistically significant impact on the ex post real interest rate yields on both three-year and seven-year Treasury notes, even after allowing for quantitative easing and other factors. The study also considers the 1980-2012 time period and offers simple robustness testing.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55269.

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Date of creation: 10 Apr 2014
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Handle: RePEc:pra:mprapa:55269

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Keywords: budget deficits; real three-year Treasury yield; real seven-year Treasury yield; quantitative easing;

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  1. Barth, James R & Iden, George & Russek, Frank S, 1986. "Government Debt, Government Spending, and Private Sector Behavior: Comment," American Economic Review, American Economic Association, vol. 76(5), pages 1158-67, December.
  2. Cebula, Richard J. & Koch, James V., 1994. "Federal budget deficits, interest rates, and international capital flows: A further note," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(1), pages 117-120.
  3. Richard J. Cebula, 2013. "An exploratory inquiry into the impact of budget deficits on the nominal interest rate yield on Moody's Aaa-rated corporate bonds, 1973--2012," Applied Economics Letters, Taylor & Francis Journals, vol. 20(16), pages 1497-1500, November.
  4. Richard J. Cebula, 2005. "Recent empirical evidence on the impact of the primary budget deficit on nominal longer term treasury note interest rate yields," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 7(1), pages 47-58.
  5. Vito Tanzi, 1985. "Fiscal Deficits and Interest Rates in the United States: An Empirical Analysis, 1960-84 (Déficits budgétaires et taux d'intérêt aux Etats-Unis: analyse empirique, 1960-84) (El déficit f," IMF Staff Papers, Palgrave Macmillan, vol. 32(4), pages 551-576, December.
  6. James R. Barth & George Iden & Frank S. Russek, 1984. "Do Federal Deficits Really Matter?," Contemporary Economic Policy, Western Economic Association International, vol. 3(1), pages 79-95, 09.
  7. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
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