The Federal Government Deficit, Interest Rates, and Moderating Linkages
The relationship between federal deficits and interest rates was investigated for the United States using a loanable funds model incorporating the five major linkages that tend to moderate the relationship. Deficits and nominal interest rates were found to be positively related, with the five other relationships moderating the response. The Federal Reserve reaction was the strongest offsetting linkage over the 1974-1989 period, reducing the mean predicted interest rate level by about one-third. The capital inflow response was also quite important. The responses of credit demanders and savers to interest rate changes, and of savers discounting future taxes, were statistically significant, but small.
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Volume (Year): 48 (1995)
Issue (Month): 2 ()
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