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Deficits, Explicit Debt, Implicit Debt, and Interest Rates: Some Empirical Evidence

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  • Zijun Wang
  • Andrew J. Rettenmaier

Abstract

This study revisits the long‐standing issue of the relationship between government borrowing and long‐term interest rates through innovations accounting in vector autoregression models. In particular, we consider the dynamic effects of primary deficits and both explicit and implicit debt on long‐term interest rates. In addition to the widely used Cholesky decomposition, the emerging method of directed acyclic graphs is also used for the purpose of model identification. We find that federal deficits and explicit and implicit debt all affect the nominal long‐term interest rates to varying degrees; although, the effects tend to die out after several years. The evidence assembled here is preliminary because of data availability. Nevertheless, it does suggest that it is important to consider the increasing amount of debt implicit in the government entitlement programs in the future discussion of fiscal discipline.

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  • Zijun Wang & Andrew J. Rettenmaier, 2008. "Deficits, Explicit Debt, Implicit Debt, and Interest Rates: Some Empirical Evidence," Southern Economic Journal, John Wiley & Sons, vol. 75(1), pages 208-222, July.
    • Handle: RePEc:wly:soecon:v:75:y:2008:i:1:p:208-222
    DOI: 10.1002/j.2325-8012.2008.tb00899.x
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