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A Note on Interest Rates and Structural Federal Budget Deficits

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  • Kitchen, John

Abstract

This paper provides evidence on the response of interest rates to Federal budget deficits. A simple model is presented that incorporates the role of monetary policy in the determination of short-run interest rates and that ascribes the effects of government budget imbalances on the term structure of interest rates to uncertainty about the expected evolution of inflation and real interest rates. Empirical results support the view that the term structure of interest rates is affected by Federal budget deficits, with a significant positive response of intermediate- and long-term interest rates relative to short-term rates in response to budget deficits.

Suggested Citation

  • Kitchen, John, 2002. "A Note on Interest Rates and Structural Federal Budget Deficits," MPRA Paper 21069, University Library of Munich, Germany, revised Oct 2002.
    • Handle: RePEc:pra:mprapa:21069
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    File URL: https://mpra.ub.uni-muenchen.de/21069/1/MPRA_paper_21069.pdf
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    References listed on IDEAS

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    1. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    2. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    3. Wachtel, Paul & Young, John, 1987. "Deficit Announcements and Interest Rates," American Economic Review, American Economic Association, vol. 77(5), pages 1007-1012, December.
    4. 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.
    5. Evans, Paul, 1986. "Is the dollar high because of large budget deficits?," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 227-249, November.
    6. Plosser, Charles I., 1987. "Fiscal policy and the term structure," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 343-367, September.
    7. 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.
    8. 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.
    9. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    10. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
    11. Thorbecke, Willem, 1993. "Why deficit news affects interest rates," Journal of Policy Modeling, Elsevier, vol. 15(1), pages 1-11, February.
    12. Evans, Paul, 1987. "Do budget deficits raise nominal interest rates? : Evidence from six countries," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 281-300, September.
    13. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    14. 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.
    15. Douglas W. Elmendorf, "undated". "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 (US).
    16. Charles L. Evans, 1998. "Real-time Taylor rules and the federal funds futures market," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 44-55.
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    Citations

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    Cited by:

    1. Kameda, Keigo, 2014. "Budget deficits, government debt, and long-term interest rates in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 32(C), pages 105-124.
    2. Oseni O. Isiaq & Adesoye A. Bolaji, 2016. "Fiscal Policy and Term Structure of Interest Rate in Nigeria," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(2), pages 70-83, April.
    3. Sohrab Rafiq, 2015. "How Important are Debt and Growth Expectations for Interest Rates?," IMF Working Papers 15/94, International Monetary Fund.
    4. Chinn, Menzie David & Frankel, Jeffrey A., 2003. "The Euro Area and World Interest Rates," Santa Cruz Department of Economics, Working Paper Series qt2nb2h4zr, Department of Economics, UC Santa Cruz.
    5. Eric M. Engen & R. Glenn Hubbard, 2005. "Federal Government Debt and Interest Rates," NBER Chapters,in: NBER Macroeconomics Annual 2004, Volume 19, pages 83-160 National Bureau of Economic Research, Inc.
    6. repec:dug:journl:y:2016:i:2:p:70-83 is not listed on IDEAS
    7. John Kitchen & Menzie Chinn, 2011. "Financing US Debt: Is There Enough Money in the World – and at What Cost?," International Finance, Wiley Blackwell, vol. 14(3), pages 373-413, December.

    More about this item

    Keywords

    interest rates; deficit; budget;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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