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Large Deficits Produce High Interest Rates

Author

Listed:
  • Cebula, Richard
  • Schwartzburt, Mark
  • Scott, Gerald

Abstract

Evans has argued that the federal budget deficit in the United States does not influence the real rate of interest. Indeed, Evans (1985, p. 85) goes so far as to claim that “in over a century of U.S. history, large deficits have never been associated with high interest rate”. By contrast, using two quarterly models that directly parallel Evans’ IS-LM framework, we find strong empirical evidence that the federal budget deficit does in fact raise the ex post real rate of interest. It would appear that Evans’ conclusions are questionable.

Suggested Citation

  • Cebula, Richard & Schwartzburt, Mark & Scott, Gerald, 1990. "Large Deficits Produce High Interest Rates," MPRA Paper 56486, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:56486
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    File URL: https://mpra.ub.uni-muenchen.de/56486/1/MPRA_paper_56486.pdf
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    References listed on IDEAS

    as
    1. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
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    More about this item

    Keywords

    budget deficits; interest rates; crowding out;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • 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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