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A Note on Federal Budget Deficits and the Term Structure of Real Interest Rates in the United States

  • Cebula, Richard

Using quarterly data and dealing with the ex post real rates on three month U.S. Treasury bills and 20 year U.S. Treasury bonds, this empirical note has estimated an IS-LM based regression by 2SLS. The results indicate that the budget deficit raises the slope of the yield curve. Furthermore, to the extent that private sector capital formation is sensitive to longer term real interest rates in the United States, federal budget deficits lead to crowding out of private investment and hence to slower economic growth over the longer run.

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File URL: http://mpra.ub.uni-muenchen.de/50238/1/MPRA_paper_50238.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50238.

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Date of creation: 09 May 1990
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Publication status: Published in Southern Economic Journal 4.57(1991): pp. 1170-1173
Handle: RePEc:pra:mprapa:50238
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Web page: http://mpra.ub.uni-muenchen.de

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  1. Thies, Clifford F, 1986. "Business Price Expectations: 1947-83," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(3), pages 336-54, August.
  2. Turnovsky, Stephen J, 1989. "The Term Structure of Interest Rates and the Effects of Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 321-47, August.
  3. Cebula, Richard, 1987. "Federal Government Budget Deficits and Interest Rates: A Brief Note," MPRA Paper 49829, University Library of Munich, Germany.
  4. McMillin, W. Douglas, 1986. "Federal deficits and short-term interest rates," Journal of Macroeconomics, Elsevier, vol. 8(4), pages 403-422.
  5. 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.
  6. Turnovsky, Stephen J & Miller, Marcus H, 1984. "The Effects of Government Expenditure on the Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 16-33, February.
  7. Modigliani, Franco & Shiller, Robert J, 1973. "Inflation, Rational Expectations and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, vol. 40(157), pages 12-43, February.
  8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-99, September.
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