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A Note on Deficit, Implicit Debt, and Interest Rates

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  • Zijun Wang

    () (Private Enterprise Research Center, Texas A&M University)

Abstract

This short note revisits the long-standing issue of the relationship between government borrowings and interest rates using vector autoregression (VAR) models. In particular, we consider the dynamic impacts of both official deficit and implicit debt on the interest rates. Two measures of unfunded Social Security obligations (implicit debt) are examined. The recently developed generalized forecast error variance decompositions, which are invariant to the ordering of variables in VARs, are adopted. We find that temporary shocks to the official deficit do not cause real interest rate changes in the short term but do cause moderate changes in the long term. They have significant impact on nominal interest rates in both short and long horizons. The implicit debt also appears to have some moderate influence on real interest rates at long horizons.

Suggested Citation

  • Zijun Wang, 2005. "A Note on Deficit, Implicit Debt, and Interest Rates," Southern Economic Journal, Southern Economic Association, vol. 72(1), pages 186-196, July.
  • Handle: RePEc:sej:ancoec:v:72:1:y:2005:p:186-196
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    References listed on IDEAS

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    1. Berg, Claes & Jonung, Lars, 1999. "Pioneering price level targeting: The Swedish experience 1931-1937," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 525-551, June.
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    Cited by:

    1. Edwards, Ryan D., 2014. "U.S. war costs: Two parts temporary, one part permanent," Journal of Public Economics, Elsevier, vol. 113(C), pages 54-66.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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