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Budget Deficits and Interest Rates: A Fresh Perspective

  • Ari Aisen
  • David Hauner

We extend the literature on budget deficits and interest rates in three ways: we examine both advanced and emerging economies and for the first time a large emerging market panel; explore interactions to explain some of the heterogeneity in the literature; and apply system GMM. There is overall a highly significant positive effect of budget deficits on interest rates, but the effect depends on interaction terms and is only significant under one of several conditions: deficits are high, mostly domestically financed, or interact with high domestic debt; financial openness is low; interest rates are liberalized; or financial depth is low.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/42.

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Length: 19
Date of creation: 01 Feb 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/42
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