Federal budget deficits and long-term interest rates in USA
We investigate whether the emergence of high inflation rates after 1965 and large budget deficits after 1980s caused the financial market agents to become more sensitive to the outlooks for inflation and budget deficits. Our approach is parametric and our models fully account for possible presence of ARCH effects in the data. Our results show a statistically significant positive link between the budget deficits and the slope of the yield curve which is more pronounced in the later sub-sample period. These results are in line with Reinhard and Sack [Reinhard, V., & Sack, B. (2000). The economic consequences of disappearing government debt. Brooking Papers of Economic Activity, 163-209] but in sharp contrast with Evans [Evans, P. (1985). Do large deficits produce high interest rates? American Economic Review, 7, 68-87] and Evans [Evans, P. (1987). Do budget deficits raise nominal interest rates? Journal of Monetary Economics, 20, 281-300].
References listed on IDEAS
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.:
- Pagan, Adrian R. & Schwert, G. William, 1990.
"Alternative models for conditional stock volatility,"
Journal of Econometrics,
Elsevier, vol. 45(1-2), pages 267-290.
- Adrian R. Pagan & G. William Schwert, 1989. "Alternative Models For Conditional Stock Volatility," NBER Working Papers 2955, National Bureau of Economic Research, Inc.
- Pagan, A.R. & Schwert, G.W., 1989. "Alternative Models For Conditional Stock Volatility," Papers 89-02, Rochester, Business - General.
- French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
- Plosser, Charles I., 1982. "Government financing decisions and asset returns," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 325-352.
- Echols, Michael E & Elliott, Jan Walter, 1976. "Rational Expectations in a Disequilibrium Model of the Term Structure," American Economic Review, American Economic Association, vol. 66(1), pages 28-44, March.
- Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
- Vincent Reinhart & Brian Sack, 2000. "The Economic Consequences of Disappearing Government Debt," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 163-220.
- Lloyd B. Thomas, 1999. "Survey Measures of Expected U.S. Inflation," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 125-144, Fall.
- Mascaro, Angelo & Meltzer, Allan H., 1983. "Long- and short-term interest rates in a risky world," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 485-518, November.
- Cebula, Richard J. & Rhodd, Rupert G., 1993. "A note on budget deficits, debt service payments, and interest rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 33(4), pages 439-445.
- Evans, Paul, 1987. "Do budget deficits raise nominal interest rates? : Evidence from six countries," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 281-300, September.
- Makin, John H, 1983. "Real Interest, Money Surprises, Anticipated Inflation and Fiscal Deficits," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 374-384, August. Full references (including those not matched with items on IDEAS)