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Budget Deficits, Tax Rules, and real Interest Rates

  • Martin Feldstein

This paper examines three sources of the fluctuations in real interest rates during the past three decades: changes in budget deficits, changes in tax rules, and changes in monetary policy. The evidence indicates that budget deficits and monetary policy have had a strong influence on the level of long-term interest rates but fails to identify any effect of changes in corporate tax rates and investment incentives. The analysis shows that it is projected future budget deficits rather than the current level of the actual or structural deficit that influence long-term interest rates. Each percentage point increase in the five-year projected ratio of budget deficits to GNP raises the long-term government bond rate by approximately 1.2 percentage points while the ratio of the current deficit to GNP (either actual or structural) has no significa effect. The specific parameter estimates imply that the increase in projected budget deficits was responsible for about two-thirds of the rise in the interest rates between 1977-78 and 1983-84.

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File URL: http://www.nber.org/papers/w1970.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1970.

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Date of creation: Jul 1986
Date of revision:
Handle: RePEc:nbr:nberwo:1970
Note: EFG ME PE
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  1. 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.
  2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  3. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
  4. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  5. Martin Feldstein, 1983. "Behavioral Simulation Methods in Tax Policy Analysis," NBER Books, National Bureau of Economic Research, Inc, number feld83-2, August.
  6. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Martin Feldstein & Lawrence H. Summers, 1979. "Inflation, Tax Rules, and the Long Term Interest Rates," NBER Working Papers 0232, National Bureau of Economic Research, Inc.
  8. B. Douglas Bernheim & John B. Shoven, 1985. "Pension Funding and Saving," NBER Working Papers 1622, National Bureau of Economic Research, Inc.
  9. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
  10. Feldstein, Martin S & Eckstein, Otto, 1970. "The Fundamental Determinants of the Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 363-75, November.
  11. Feldstein, Martin (ed.), 1983. "Behavioral Simulation Methods in Tax Policy Analysis," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226240848.
  12. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
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