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Interest Rates, Government Purchases, and Budget Deficits: a Forward-Looking Model

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  • Pami Dua

    (University of Connecticut)

Abstract

This article describes aforward-looking modelfor long-term interest rates. It shows that movements in expected deficits relative to movements in actual deficits are a statistically significant determtnant of changes in long-term interest rates. Other determinants include changes in actual government purchases, movements in the expected unemployment rate relative to changes in the actual unemployment rate, the expected rate of growth in the money supply, and inflation uncertainty .

Suggested Citation

  • Pami Dua, 1993. "Interest Rates, Government Purchases, and Budget Deficits: a Forward-Looking Model," Public Finance Review, , vol. 21(4), pages 470-478, October.
    • Handle: RePEc:sae:pubfin:v:21:y:1993:i:4:p:470-478
    DOI: 10.1177/109114219302100407
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    References listed on IDEAS

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    1. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
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    7. Benjamin M. Friedman, 1982. "Federal Reserve Policy, Interest Rate Volatility, and the U.S. Capital Raising Mechanism," NBER Working Papers 0917, National Bureau of Economic Research, Inc.
    8. Hendry, David F. & Richard, Jean-Francois, 1982. "On the formulation of empirical models in dynamic econometrics," Journal of Econometrics, Elsevier, vol. 20(1), pages 3-33, October.
    9. Dua, Pami & Arora, Harjit K., 1989. "Do expected budget deficits affect household expectations of interest rates?," Journal of Macroeconomics, Elsevier, vol. 11(4), pages 551-562.
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    Cited by:

    1. Valeria De Bonis & Christian Thimann, 1999. "Expansionary Effects of Fiscal Consolidation: The Role of Expectations and Interest Rates In the Case of Denmark," Public Finance Review, , vol. 27(6), pages 624-647, November.
    2. Ibrahim, Taofik, 2017. "Budget deficit-money demand nexus in Nigeria: A myth or reality?," MPRA Paper 86265, University Library of Munich, Germany, revised 09 Nov 2017.
    3. Spector, Lee C, 1999. "Macroeconomic Models and the Determination of Crowding Out," Public Finance = Finances publiques, , vol. 54(1-2), pages 84-98.

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