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An exploratory empirical inquiry into the impact of federal budget deficits on the ex post real interest rate yield on ten year Treasury notes over the last half century

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  • Richard Cebula
  • Fiorentina Angjellari-Dajci
  • Maggie Foley

Abstract

Using over a half century of data, this exploratory empirical study adopts a simple loanable funds to investigate the impact of the federal budget deficits on the ex post real interest rate yield on 10 year Treasury notes. For the period 1960–2012, an autoregressive 2SLS estimate finds that the ex post real interest rate yield on 10 year U.S. Treasury notes is an increasing function of the ex post real interest rate yield on Moody’s Baa-rated corporate bonds, the ex post real interest rate yield on 3 year Treasury notes, and the ex post real interest rate yield on high grade municipal bonds. This exploratory analysis also finds that federal budget deficit (relative to the GDP level) exercised a positive and statistically significant impact on the ex post real interest rate yield on 10 year Treasury notes, a finding consistent with a number of earlier studies of shorter time periods Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Richard Cebula & Fiorentina Angjellari-Dajci & Maggie Foley, 2014. "An exploratory empirical inquiry into the impact of federal budget deficits on the ex post real interest rate yield on ten year Treasury notes over the last half century," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(4), pages 712-720, October.
    • Handle: RePEc:spr:jecfin:v:38:y:2014:i:4:p:712-720
    DOI: 10.1007/s12197-014-9280-8
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    References listed on IDEAS

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    1. Richard Cebula & Pablo Cuellar, 2010. "Recent evidence on the impact of government budget deficits on the ex ante real interest rate yield on Moody’s Baa-rated corporate bonds," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 34(3), pages 301-307, July.
    2. Keith M. Carlson & Roger W. Spencer, 1975. "Crowding out and its critics," Review, Federal Reserve Bank of St. Louis, vol. 57(Dec), pages 2-17.
    3. 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.
    4. 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.
    5. James R. Barth & George Iden & Frank S. Russek, 1984. "Do Federal Deficits Really Matter?," Contemporary Economic Policy, Western Economic Association International, vol. 3(1), pages 79-95, September.
    6. 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.
    7. Richard J. Cebula, 2005. "Recent empirical evidence on the impact of the primary budget deficit on nominal longer term treasury note interest rate yields," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 7(1), pages 47-58.
    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. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    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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    Citations

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    Cited by:

    1. Hsing Yu, 2017. "Is Real Depreciation or More Government Deficit Expansionary? The Case of Slovenia," South East European Journal of Economics and Business, Sciendo, vol. 12(1), pages 50-56, April.
    2. Yu HSING, 2016. "Is real depreciation expansionary? The case of the Czech Republic," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 93-100, Autumn.
    3. Yu HSING, 2016. "Is real depreciation expansionary? The case of the Czech Republic," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 93-100, Autumn.
    4. Yu Hsing, 2020. "Impacts of Real Depreciation and Appreciation on Aggregate Output in Taiwan," The American Economist, Sage Publications, vol. 65(1), pages 123-130, March.
    5. Yu Hsing, 2019. "Is Currency Appreciation or Depreciation Expansionary in Kosovo?," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 22(1), pages 47-54, May.
    6. Yu Hsing, 2016. "Is Real Depreciation Expansionary? The Case of Ireland," Bulletin of Applied Economics, Risk Market Journals, vol. 3(1), pages 1-9.
    7. Hsing Yu & Hsieh Wen-jen, 2017. "Is Real Depreciation or Rising Government Debt Contractionary in India? A Simultaneous-Equation Model," Global Economy Journal, De Gruyter, vol. 17(2), pages 1-6, June.
    8. Yu Hsing, 2016. "Is Real Depreciation Contractionary? The Case of South Korea," Economics Bulletin, AccessEcon, vol. 36(4), pages 1951-1958.
    9. Yu Hsing, 2016. "Impacts of Government Debt, the Exchange Rate and Other Macroeconomic Variables on Aggregate Output in Croatia," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 14(3 (Fall)), pages 223-231.
    10. HSING, Yu, 2016. "Is Real Depreciation Expansionary? The Case Of The Slovak Republic," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 16(2), pages 55-62.
    11. Richard J. Cebula, 2018. "Impact of U.S. federal government budget deficits on the ex ante real interest rate yield on ten-year treasury notes during the post-Bretton Woods (1972–2016) era," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(4), pages 828-835, October.

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    More about this item

    Keywords

    Federal budget deficit; Real ten year interest rate yield; Financial market mechanism; E43; E52; E62; H62;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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