IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/1970.html
   My bibliography  Save this paper

Budget Deficits, Tax Rules, and real Interest Rates

Author

Listed:
  • Martin Feldstein

Abstract

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.

Suggested Citation

  • Martin Feldstein, 1986. "Budget Deficits, Tax Rules, and real Interest Rates," NBER Working Papers 1970, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1970
    Note: EFG ME PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w1970.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. 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..
    2. B. Douglas Bernheim & John B. Shoven, 1988. "Pension Funding and Saving," NBER Chapters, in: Pensions in the U.S. Economy, pages 85-114, National Bureau of Economic Research, Inc.
    3. Martin Feldstein & Lawrence Summers, 1983. "Inflation, Tax Rules, and the Long-term Interest Rate," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 153-185, National Bureau of Economic Research, Inc.
    4. 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 610-622, September.
    5. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    6. 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.
    7. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    8. Martin Feldstein, 1983. "Behavioral Simulation Methods in Tax Policy Analysis," NBER Books, National Bureau of Economic Research, Inc, number feld83-2, December.
    9. 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.
    10. Feldstein, Martin (ed.), 1983. "Behavioral Simulation Methods in Tax Policy Analysis," National Bureau of Economic Research Books, University of Chicago Press, number 9780226240848, March.
    11. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    12. Boskin, Michael J. & Kotlikoff, Laurence J., 1985. "Public debt and United States saving: A new test of the neutrality hypothesis," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 23(1), pages 55-86, January.
    13. 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 363-375, November.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Andrew Coleman, 2019. "Liquidity, the government balance sheet, and the public sector discount rate," Working Papers 19_13, Motu Economic and Public Policy Research.
    2. Thomas Laubach, 2011. "Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 7(1), pages 7-30.
    3. Manmohan S. Kumar & Emanuele Baldacci, 2010. "Fiscal Deficits, Public Debt, and Sovereign Bond Yields," IMF Working Papers 10/184, International Monetary Fund.
    4. Andrea Terzi, 2007. "WP 2007-4 Fiscal deficits in the U.S. and Europe: Revisiting the link with interest rates," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2007-4, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    5. Panagiotis Petrakis & Emmanuel Papadakis & Nikoleta Daniilopoulou, 2012. "Public Statements on Sovereign Yield Spreads:The Greek Case," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 6(2), pages 5-16, December.
    6. Martin S. Feldstein, 1986. "The Budget Deficit and the Dollar," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 355-409, National Bureau of Economic Research, Inc.
    7. Amal Soliman ElGhouty, 2018. "Public Debt and Economic Growth in Egypt," Business and Economic Research, Macrothink Institute, vol. 8(3), pages 183-200, September.
    8. Basil Dalamagas & Stefanos Tantos, 2016. "Optimal Versus Actual Maturity of Government Debt: The Case of Greece," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 66(3), pages 25-52, July-Sept.
    9. Stephanie Kelton, 2011. "Limitations of the Government Budget Constraint: Users vs. Issuers of the Currency," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(1), pages 57-66, March.
    10. Basil Dalamagas & Stefanos Tantos, 2017. "Optimal Sovereign Debt for an Overdebted Country," Australian Economic Papers, Wiley Blackwell, vol. 56(2), pages 95-118, June.
    11. Jemima Peppel-Srebrny, 2018. "Government borrowing cost and balance sheets: do assets matter?," Economics Series Working Papers 860, University of Oxford, Department of Economics.
    12. B. Douglas Bernheim, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316, National Bureau of Economic Research, Inc.
    13. Gale, William G. & Orszag, Peter R., 2003. "Economic Effects of Sustained Budget Deficits," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 463-485, September.
    14. Naeem Akram, 2013. "Empirical examination of debt and growth nexus in South Asian countries," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 20(2), pages 29-52, December.
    15. Jeffrey A. Frankel & Saburo Okita & Peter G. Peterson & James R. Schlesinger, 1988. "International Capital Flows and Domestic Economic Policies," NBER Chapters, in: The United States in the World Economy, pages 559-658, National Bureau of Economic Research, Inc.
    16. José Pablo Barquero Romero & Kerry Loaiza Marín, 2017. "Inflation and Public Debt," Monetaria, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(1), pages 39-94, January-J.
    17. Martin Feldstein & Joosung Jun, 1987. "The Effects of Tax Rules on Nonresidential Fixed Investment: Some Preliminary Evidence from the 1980s," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 101-162, National Bureau of Economic Research, Inc.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.),Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669, Elsevier.
    2. Darby, Michael R., 1986. "The internationalization of American banking and finance: Structure, risk, and world interest rates," Journal of International Money and Finance, Elsevier, vol. 5(4), pages 403-428, December.
    3. Maria Carme Riera i Prunera, 2003. "Deficit, human capital and economic growth dynamics," Working Papers in Economics 102, Universitat de Barcelona. Espai de Recerca en Economia.
    4. Darrat, Ali F & Glascock, John L, 1993. "On the Real Estate Market Efficiency," The Journal of Real Estate Finance and Economics, Springer, vol. 7(1), pages 55-72, July.
    5. Fehr, Hans & Ruocco, Anna, 1999. "Equity and efficiency aspects of the Italian debt reduction," Economic Modelling, Elsevier, vol. 16(4), pages 569-589, December.
    6. Lorenzo Pozzi, 2003. "Tax Discounting in a High‐debt Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(3), pages 261-282, July.
    7. Carlos Vieira, 2004. "The Deficit?Interest Rate Connection: an empirical assessment of the EU," Economics Working Papers 5_2004, University of Évora, Department of Economics (Portugal).
    8. David Alan Aschauer, 1990. "Is Government Spending Stimulative?," Contemporary Economic Policy, Western Economic Association International, vol. 8(4), pages 30-46, October.
    9. Katheline Schubert & Pierre-Yves Letournel, 1991. "Un modèle d'équilibre général appliqué à l'étude de la fiscalité française," Économie et Prévision, Programme National Persée, vol. 98(2), pages 83-99.
    10. Bruno Ducoudre, 2008. "Structure par terme des taux d’intérêt et anticipations de la politique économique," Sciences Po publications info:hdl:2441/5221, Sciences Po.
    11. Artidiatun Adji & James Alm, 2016. "Testing for Ricardian Equivalence in Indonesia," Working Papers 1616, Tulane University, Department of Economics.
    12. Martin S. Feldstein, 1986. "The Budget Deficit and the Dollar," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 355-409, National Bureau of Economic Research, Inc.
    13. Frederick T. Furlong, 1989. "International dimensions of U.S. economic policy in the 1980s," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 3-16.
    14. Leiderman, Leonardo & Razin, Assaf, 1988. "Testing Ricardian Neutrality with an Intertemporal Stochastic Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 1-21, February.
    15. Brunila, Anne, 1997. "Current income and private consumption : Saving decisions : Testing the finite horizon model," Research Discussion Papers 6/1997, Bank of Finland.
    16. R. Glenn Hubbard & Kenneth L. Judd, 1987. "Finite Lifetimes, Borrowing Constraints, and Short-Run Fiscal Policy," NBER Working Papers 2158, National Bureau of Economic Research, Inc.
    17. Andrew B. Abel & Laurence J. Kotlikoff, 1988. "Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism," NBER Working Papers 2490, National Bureau of Economic Research, Inc.
    18. Chakraborty, Lekha S., 2006. "Fiscal deficit, capital formation, and crowding out: Evidence from India," Working Papers 06/43, National Institute of Public Finance and Policy.
    19. James R. Barth & George Iden & Frank S. Russek, 1984. "Do Federal Deficits Really Matter?," Contemporary Economic Policy, Western Economic Association International, vol. 3(1), pages 79-95, September.
    20. Yu Hsing, 2015. "Determinants of the Government Bond Yield in Spain: A Loanable Funds Model," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 3(3), pages 1-9, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    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:nbr:nberwo:1970. 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: http://edirc.repec.org/data/nberrus.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.