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An Empirical Analysis for the U.S. of the Effects of Government Budget Deficits on the Ex Ante Real Interest Rate Yields on Thirty-Year and Twenty-Year Treasury Bonds

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  • Cebula, Richard J.

    (Jacksonville University, Davis College of Business, Jacksonville, Florida, U.S.A.)

  • Foley, Maggie

    (Jacksonville University, Davis College of Business, Jacksonville, Florida, U.S.A.)

Abstract

This study empirically investigates the impact of federal government budget deficits on the ex ante real interest rate yield on thirty-year and twenty-year U.S. Treasury bonds. After allowing for the exchange rate and a variety of other control variables, it is found that autoregressive two stage least squares estimations for the post-Bretton Woods era reveal that the ex ante real interest rate yields on both of these bonds have been an increasing function of the federal budget deficit. Accordingly, since long-term U.S. Treasury bond issues compete directly with household bond issues (such as home mortgages) as well as corporate bond issues in the financial marketplace, legislators and other policy-makers should circumspect about the potential implications of actions that increase the magnitude of budget deficits. This is because higher budget deficits are very likely to elevate longer-term ex ante real interest rates affecting household purchases of durable goods, such as housing and business investment in new plant and equipment and technology and hence are likely to adversely influence long-term macro-economic growth through crowding-out effects. Un’analisi empirica degli effetti del deficit USA sui tassi di interesse reali ex-ante sui bond del Tesoro a 20 e a 30 anni Questo lavoro analizza l’impatto del deficit di bilancio federale sui tassi di interesse reale ex-ante sui bond del tesoro a 20 e a 30 anni. Dopo aver preso in considerazione il tasso di cambio ed altre variabili di controllo è emerso che stime quadratiche minime autoregressive a due livelli per l’era post-Bretton Woods rivelano che il rendimento reale ex-ante su entrambi i tipi di bond sono una funzione crescente del deficit di bilancio federale. Di conseguenza, poiché l’emissione di bond del tesoro statunitense a lungo termine è in diretta competizione con l’emissione di bond domestici (come i mutui immobiliari) o di corporate bond del mercato finanziario, il legislatore e il governo dovrebbero riflettere sulle potenziali implicazioni delle politiche che fanno aumentare il deficit di bilancio. Questo perché un deficit maggiore può verosimilmente far crescere il tasso di interesse reale ex ante su un periodo più lungo, influenzando così la domanda interna di beni durevoli come gli immobili e gli investimenti in nuovi impianti e tecnologie e di conseguenza influenzare negativamente la crescita macro-economica di lungo periodo tramite effetti spiazzamento.

Suggested Citation

  • Cebula, Richard J. & Foley, Maggie, 2019. "An Empirical Analysis for the U.S. of the Effects of Government Budget Deficits on the Ex Ante Real Interest Rate Yields on Thirty-Year and Twenty-Year Treasury Bonds," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 72(2), pages 231-252.
    • Handle: RePEc:ris:ecoint:0847
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    References listed on IDEAS

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    1. Bharat R. Kolluri & Rao N. Singamesetti & P. A. V. B. Swamy, 1988. "What do regressions of interest rates on deficits imply?," Finance and Economics Discussion Series 3, Board of Governors of the Federal Reserve System (U.S.).
    2. Richard J. Cebula, 2013. "An exploratory inquiry into the impact of budget deficits on the nominal interest rate yield on Moody's Aaa-rated corporate bonds, 1973--2012," Applied Economics Letters, Taylor & Francis Journals, vol. 20(16), pages 1497-1500, November.
    3. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    4. James B. Bullard, 2017. "An Illustrative Calculation of r† with Policy Implications : a presentation at Federal Reserve Bank of St. Louis Central Bank Forecasting Conference, St. Louis, Mo. November 9, 2017," Speech 293, Federal Reserve Bank of St. Louis.
    5. William Gissy, 1999. "Net treasury borrowing and interest-rate changes," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 23(1), pages 23-29, March.
    6. 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 and Business, vol. 27(2), pages 349-361.
    7. Barth, James R & Iden, George & Russek, Frank S, 1986. "Government Debt, Government Spending, and Private Sector Behavior: Comment," American Economic Review, American Economic Association, vol. 76(5), pages 1158-1167, December.
    8. Cebula, Richard J. & Saltz, Ira S., 1998. "Ex Ante Real Long-Term Interest Rates and U.S. Federal Budget Deficits: Preliminary Error-Correction Evidence, 1971-1991," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 51(2), pages 163-169.
    9. Cebula, Richard J. & Koch, James V., 1994. "Federal budget deficits, interest rates, and international capital flows: A further note," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(1), pages 117-120.
    10. Bradley Ewing & Mark Yanochik, 1999. "Budget deficits and the term structure of interest rates in Italy," Applied Economics Letters, Taylor & Francis Journals, vol. 6(3), pages 199-201.
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    More about this item

    Keywords

    Budget Deficits; Ex Ante Real Interest Rate Yields; Thirty-Year Treasury Bonds; Twenty-Year Treasury Bonds; Monetary Policy; Crowding Out;
    All these keywords.

    JEL classification:

    • 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; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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