Does Greater Economic Freedom Lower the Nominal Interest Rate Yield and Help Offset the Interest Rate Impact of the Primary Budget Deficit? An ARDL Analysis of the 7-Year Treasury Yield

This study seeks to gain insight into the impact of economic freedom on the nominal interest rate yield on 7-year U.S. Treasury notes, an interest rate yield that has received effectively no attention in the scholarly literature during the 21st century to date. It is hypothesized that greater economic freedom acts to reduce the nominal interest rate yield on 7-year Treasury issues. Additionally, this study seeks to investigate the interest rate impact of federal government overspending. To reflect the latter, this study adopts the primary budget deficit rather than the much more commonly studied total budget deficit. The primary deficit focuses on the difference between federal government revenues and federal government outlays, excluding all interest payments. Following the conventional wisdom, it is expected that a greater primary deficit acts to elevate the interest rate yields. Within the context of autoregressive distributed-lag (ARDL) estimates, we investigate, using annual data, whether in the context of a progressive income taxation greater economic freedom helps to diminish the interest rate while the primary deficit elevates it, so that greater economic freedom helps to offset the interest-rate impact of budget deficits.