IDEAS home Printed from
   My bibliography  Save this paper

Interest Rates and Bond-Financed Deficits in a Ricardian Two-Party Democracy


  • Minford, Patrick


The thesis of this paper is that political differences between parties are a major explanation of inflation and variations in it, and therefore introduce into real interest rates a risk premium which will vary with creditors' exposure to 'inflationary default', i.e., with the level of public debt. The paper tests a number of predictions of this theory. First, that political parties do differ in their policy behaviour (contrary to the median voter theorem); this is clearly supported by postwar evidence for the United Kingdom, West Germany and Sweden. Second, expected real interest rates on bonds are related to budget deficits and/or public debt, according to evidence for the United States and United Kingdom from 1920 to 1982. Third, we find some modest but (as we expected from the indirectness of the relationship) rather weak evidence of a connection between which party was in power and the level and variability of inflation in the same period for these two countries. Fourth, the theory provides a rationale for the commonly observed relationship between inflation and its variability.

Suggested Citation

  • Minford, Patrick, 1985. "Interest Rates and Bond-Financed Deficits in a Ricardian Two-Party Democracy," CEPR Discussion Papers 79, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:79

    Download full text from publisher

    File URL:
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

    As the access to this document is restricted, you may want to search for a different version of it.


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Jesper Lindé, 2001. "Fiscal policy and interest rates in a small open economy," Finnish Economic Papers, Finnish Economic Association, vol. 14(2), pages 65-83, Autumn.
    2. Kapopoulos, Panayotis, 1995. "Disinflation and credibility in small open European economies in the 1980s: Parties, elections and the ERM," European Journal of Political Economy, Elsevier, vol. 11(1), pages 157-170, March.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:79. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.