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Does more government deficit raise the interest rate? Application of extended loanable funds model to Slovenia

  • Yu Hsing

    ()

    (Southeastern Louisiana University, College of Business, USA)

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    Extending the open-economy loanable funds model, this paper finds that more government deficit as a percentage of GDP does not lead to a higher government bond yield. In addition, a higher real Treasury bill rate, a higher expected inflation rate, a higher EU government bond yield, or an expected depreciation of the euro against the U.S. dollar would increase Slovenia’s long-term interest rate. The negative coefficient of the percentage change in real GDP is insignificant at the 10% level. Applying the standard closed-economy or open-economy loanable funds model without including the world interest rate and the expected exchange rate, we find similar conclusions except that the positive coefficient of the ratio of the net capital inflow to GDP has a wrong sign and is insignificant at the 10% level.

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    Article provided by University of Rijeka, Faculty of Economics in its journal Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics.

    Volume (Year): 27 (2009)
    Issue (Month): 2 ()
    Pages: 349-361

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    Handle: RePEc:rfe:zbefri:v:27:y:2009:i:2:p:349-361
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    1. R.J. Cebula, 1997. "Government deficit, ex post real long-term interest rates and causality," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 50(202), pages 325-336.
    2. Cebula, Richard & Koch, James, 1988. "An Empirical Note on Deficits, Interest Rates, and International Capital Flows," MPRA Paper 50165, University Library of Munich, Germany.
    3. David Aschauer, 1988. "Does public capital crowd out private capital?," Staff Memoranda 88-10, Federal Reserve Bank of Chicago.
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    5. Robert J. Barro, 1986. "Government Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom, 1701-1918," NBER Working Papers 2005, National Bureau of Economic Research, Inc.
    6. Cebula, Richard, 1996. "The Impact of Net International Capital Inflows on Nominal Long-Term Interest Rates in France," MPRA Paper 49401, University Library of Munich, Germany, revised 26 Jun 1996.
    7. Cebula, Richard J, 1991. "Federal Government Budget Deficits and Interest Rates: Reply," Public Finance = Finances publiques, , vol. 46(2), pages 331-34.
    8. Cebula, Richard J & Belton, Willie J, 1993. "Government Budget Deficits and Interest Rates in the United States: Evidence for Closed and Open Systems Put into Perspective, 1955-1989," Public Finance = Finances publiques, , vol. 48(2), pages 188-209.
    9. Richard Cebula, 1998. "Budget deficits and long-term interest rates: 1973–91," International Advances in Economic Research, International Atlantic Economic Society, vol. 4(4), pages 374-383, November.
    10. Richard Cebula, 1999. "Budget deficits, capital flows, and long-term interest rates: Cointegration findings for the united kingdom," International Advances in Economic Research, International Atlantic Economic Society, vol. 5(4), pages 489-495, November.
    11. Cebula, Richard, 1990. "A Note on Federal Budget Deficits and the Term Structure of Real Interest Rates in the United States," MPRA Paper 50238, University Library of Munich, Germany.
    12. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    13. Richard Cebula, 2003. "Budget deficits and interest rates in Germany," International Advances in Economic Research, International Atlantic Economic Society, vol. 9(1), pages 64-68, February.
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