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Interest rates and budget deficits revisited-evidence from the G7 countries

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  • David Hauner
  • Manmohan Kumar

Abstract

This article revisits whether budget deficits affect interest rates, and broadens the literature by examining whether financial globalization has changed this relationship. A structural model of interest determination is extended to account for the fact that official capital flows are determined differently than private flows and is estimated for a 1960-2005 G7 panel. We find that deficits have a significant but small effect on long-term rates, but that this result depends on the fiscal concept used. Moreover, we find no evidence of structural change in interest rate determination in the recent decades, with the exception of an increased impact of insurance-related capital inflows in recent years.

Suggested Citation

  • David Hauner & Manmohan Kumar, 2011. "Interest rates and budget deficits revisited-evidence from the G7 countries," Applied Economics, Taylor & Francis Journals, vol. 43(12), pages 1463-1475.
    • Handle: RePEc:taf:applec:v:43:y:2011:i:12:p:1463-1475
    DOI: 10.1080/00036840802600574
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    1. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
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    8. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
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