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Federal Government Budget Deficits and Interest Rates: A Brief Note

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  • Cebula, Richard

Abstract

This empirical note investigates the impact of the federal budget deficit upon the nominal long term rate of interest. The analysis differs from the existing literature on a number of counts. To begin with, the analysis uses the most updated evidence available on the structural deficit, as well as newly available data on inflationary expectations. Next, unlike previous studies, the variable federal purchases of goods and services is expressly introduced into the model as an explanatory variable. In addition, since the total federal deficit is in this paper broken into its two component parts, the structural deficit (which is exogenous) and the cyclical deficit (which is not exogenous), the model expressly deals with the problem of simultaneity bias involving the cyclical deficit. Finally, the monetary policy measure, government purchases of goods and services, and the two deficit measures are not only expressed in real terms but also are divided by trend real GNP; this is because monetary policy actions, government purchases of goods and services, and the budget deficit must all be judged relative to the size of the economy. The 2SLS estimation reveals that federal budget deficits act to elevate the nominal long term interest rate.

Suggested Citation

  • Cebula, Richard, 1987. "Federal Government Budget Deficits and Interest Rates: A Brief Note," MPRA Paper 49829, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:49829
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    File URL: https://mpra.ub.uni-muenchen.de/49829/1/MPRA_paper_49829.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. Thies, Clifford F, 1986. "Business Price Expectations: 1947-83," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(3), pages 336-354, August.
    3. 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.
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    Cited by:

    1. Sinai, Allen, 2006. "Deficits, expected deficits, financial markets, and the economy," The North American Journal of Economics and Finance, Elsevier, vol. 17(1), pages 79-101, March.
    2. Samwel Mwigeka, 2016. "Do Budget Deficit Crowds Out Private Investment: A Case of Tanzanian Economy," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(6), pages 183-183, May.
    3. Cebula, Richard, 1990. "A Note on Federal Budget Deficits and the Term Structure of Real Interest Rates in the United States," MPRA Paper 50238, University Library of Munich, Germany.
    4. Michael A. Conte & Ali F. Darrat, 1993. "Testing Alternative Views Of Government Budgeting," Review of Financial Economics, John Wiley & Sons, vol. 3(1), pages 19-40, September.
    5. William Gissy, 1999. "Net treasury borrowing and interest-rate changes," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 23(1), pages 23-29, March.
    6. Cebula, Richard, 1996. "An Empirical Note on the Impact of the Federal Budget Deficit on Ex Ante Real Long-Term, Interest Rates, 1973-1995," MPRA Paper 51414, University Library of Munich, Germany.

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    More about this item

    Keywords

    federal budget deficits; long term interest rate; inflationary expectations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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