IDEAS home Printed from https://ideas.repec.org/p/quc/wpaper/0005.html
   My bibliography  Save this paper

Do Budget Deficits Raise Interest Rates? A Survey of the Empirical Literature

Author

Listed:
  • Leanne Ussher

    () (Department of Economics and BBA, Queens College of the City University of New York)

Abstract

Do government budget deficits raise interest rates and thus “crowd out” private investment? This question has been the topic of a multitude of empirical studies, which proposed to evaluate the impact of financing government activity. We survey the theory and some empirical results. Traditional theories either support deficits having a positive or a neutral effect on interest rates. Various tests of these propositions yield diverse results, and one can find all conclusions – that deficits raise, decrease or do not effect interest rates. Also, there is little attempt to ground their assumption that rising interest rates result in a crowding out of private borrowing and investment. The problem with many of the empirical studies begins with their narrow theoretical underpinnings which are driven by assumptions of resource constraints, exogenous money supply, or government budget constraints. Alternatively, models that derive their economics from the demand side determining supply, have a transmission mechanisms missing from traditional models that may explain econometric testing incongruities. Such models take account of multi-asset markets, investment accelerators and consider the alternative causality - interest rates to budget deficits. They emphasize financial market instruments, investor behavior, and the relationship between the treasury and the central bank in determining fiscal and monetary policy. As a result, such models provide a richer understanding to the interaction between deficits and interest rates in their institutional setting.

Suggested Citation

  • Leanne Ussher, 1998. "Do Budget Deficits Raise Interest Rates? A Survey of the Empirical Literature," Working Papers 0005 Classification- JEL:, Department of Economics, Queens College of the City University of New York.
  • Handle: RePEc:quc:wpaper:0005
    as

    Download full text from publisher

    File URL: http://www.qc-econ-bba.org/RePEc/pdf/0005.pdf
    Download Restriction: no

    Citations

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


    Cited by:

    1. Shoora B. Paudyal, 2013. "Do Budget Deficits Raise Interest Rates in Nepal?," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 25(1), pages 51-66, April.
    2. Mathew Forstater, 2012. "Jobs and Freedom Now! Functional Finance, Full Employment, and the Freedom Budget," The Review of Black Political Economy, Springer;National Economic Association, vol. 39(1), pages 63-78, March.

    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:quc:wpaper:0005. 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: (Cara Marshall). General contact details of provider: http://edirc.repec.org/data/deqcuus.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.

    We have no references for this item. You can help adding them by using 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.