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

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  • Yu Hsing

    () (Southeastern Louisiana University, College of Business, USA)

Abstract

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.

Suggested Citation

  • Yu Hsing, 2009. "Does more government deficit raise the interest rate? Application of extended loanable funds model to Slovenia," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 27(2), pages 349-361.
  • Handle: RePEc:rfe:zbefri:v:27:y:2009:i:2:p:349-361
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    File URL: https://www.efri.uniri.hr/sites/efri.hr/files/cr-collections/2/yuhsing-2009-2.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    government deficits; long-term interest rates; loanable funds model expected inflation; world interest rates; expected exchange rates;

    JEL classification:

    • P43 - Economic Systems - - Other Economic Systems - - - Finance; Public Finance
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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