IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

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

Listed author(s):
  • Leanne Ussher

    ()

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

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

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

Paper provided by Department of Economics, Queens College of the City University of New York in its series Working Papers with number 0005 Classification- JEL:.

as
in new window

Length: 39 pages
Date of creation: Apr 1998
Handle: RePEc:quc:wpaper:0005
Contact details of provider: Postal:
300 Powdermaker Hall, 65-30 Kissena Blvd., Flushing New York 11367

Phone: 718-997-5440
Fax: 718-997-5466
Web page: http://www.qc-econ-bba.org

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

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)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.