New evidence on the interest rate effects of budget deficits and debt
Estimating the effects of government debt and deficits on Treasury yields is complicated by the need to isolate the effects of fiscal policy from other influences. To abstract from the effects of the business cycle, and associated monetary policy actions, on debt, deficits, and interest rates, this paper studies the relationship between long-horizon expected government debt and deficits, measured by CBO and OMB projections, and expected future long-term interest rates. The estimated effects of government debt and deficits on interest rates are statistically and economically significant: a one percentage point increase in the projected deficit-to-GDP ratio is estimated to raise long-term interest rates by roughly 25 basis points. Under plausible assumptions these estimates are shown to be consistent with predictions of the neoclassical growth model.
|Date of creation:||2003|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Feldstein, Martin S, 1976.
"Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis,"
American Economic Review,
American Economic Association, vol. 66(5), pages 809-20, December.
- Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
- Elmendorf, D.W., 1993. "Actual Budget Deficit Expectations and Interest Rates," Harvard Institute of Economic Research Working Papers 1639, Harvard - Institute of Economic Research.
- Douglas W. Elmendorf & N. Gregory Mankiw, 1998.
Harvard Institute of Economic Research Working Papers
1820, Harvard - Institute of Economic Research.
- Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government debt," Finance and Economics Discussion Series 1998-09, Board of Governors of the Federal Reserve System (U.S.).
- Elmendorf, Douglas W. & Mankiw, N, 1999. "Government Debt," Scholarly Articles 2643866, Harvard University Department of Economics.
- Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government Debt," NBER Working Papers 6470, National Bureau of Economic Research, Inc.
- Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 34-58, February.
- Douglas W. Elmendorf, 1996.
"The effects of deficit-reduction laws on real interest rates,"
Finance and Economics Discussion Series
96-44, Board of Governors of the Federal Reserve System (U.S.).
- Douglas W. Elmendorf, . "The Effect of Deficit-Reduction Laws on Real Interest Rates," Finance and Economics Discussion Series 1996-44, Board of Governors of the Federal Reserve System (U.S.).
- Plosser, Charles I., 1987. "Fiscal policy and the term structure," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 343-367, September.
- Plosser, Charles I., 1982. "Government financing decisions and asset returns," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 325-352.
- Laurence Ball & Stephen G. Cecchetti, 1990. "Inflation and Uncertainty at Long and Short Horizons," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 215-254.
- Martin Feldstein & Charles Horioka, 1979.
"Domestic Savings and International Capital Flows,"
NBER Working Papers
0310, National Bureau of Economic Research, Inc.
- Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "Should the European Central Bank and the Federal Reserve be concerned about fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 333-389.
- Sharon Kozicki & Peter A. Tinsley, 1997.
"Shifting endpoints in the term structure of interest rates,"
Research Working Paper
97-08, Federal Reserve Bank of Kansas City.
- Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
- Kitchen, John, 1996. "Domestic and international financial market responses to Federal deficit announcements," Journal of International Money and Finance, Elsevier, vol. 15(2), pages 239-254, April.
When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2003-12. 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: (Franz Osorio)
If references are entirely missing, you can add them using this form.