Budget deficits and interest rates in the United States

Abstract

During the last several years, the issue of the effect of budget deficits on interest rates in the United States has attracted considerable attention. However, not only has the issue remained unsettled, but more recently has become even more clouded by conflicting evidence. For example, Cebula (1987) reported a significant and positive effect on ex post short-term real interest rate, Kolluri and Giannaros (1987) a significant and negative effect on ex-ante short-term real rate, Makin (1983) a 'mixed to weak' positive effect using short-term nominal rate and Hoelscher (1983), Motley (1983) and Evans (1985Evans ( , 1987 an insignificant effect, again, using short-term nominal interest rate as the dependent variable.A strict comparison of these studies is not possible because of the differences in the definition of the dependent variable employed, in the selection of the determinants, the data and the estimation procedures used. The aim of this paper is to test whether budget deficits influence interest rates regardless of whether they are nominal or real and if real, whether ex-post or ex-ante and in all cases, whether short-term or long-term, using the same set of data. A by-product of the study is that it sheds light on the 'inverted' Fisher hypothesis recently proposed by Carmichael and Stebbing (1983). The model and the dataIn order to test the robustness of our results, as far as the dependent variable was concerned, the following equations were estimated: i = a 1 + bli~ + clU + dlDEF + elM + v I (1) i = a 2 + bzi~e + c2U + d2DEF + ezM + v 2 (2) * Thanks are due to Zheng Wei for research assistance.

Determinants of the Government Bond Yield in Spain: A Loanable Funds Model

“…Feldstein [1], Hoelscher [2], Wachtel and Young [3], Zahid [4], Thomas and Abderrezak [5], Miller and Russek [6], Raynold [7], Cebula [8], Vamvoukas [9], Ewing and Yanochik [10], and Saleh and Harvie [11] maintained that there is a positive relationship between the government deficit/debt and the interest rate. However, Kormendi [12], Hoelscher [13], Aschauer [14], Makin [15], McMillin [16], Evans [17][18][19], Gupta [20], Darrat [21,22], Findlay [23], and Ostrosky [24] indicated that more government deficit/debt would not lead to a higher interest rate. Barro [25][26][27] argued that more government deficit/debt would not increase aggregate demand because people would save more in order to pay more future tax to pay off government debt.…”

Interest Rate Determination in India: Empirical Evidence on Fiscal Deficit – Interest Rate Linkages and Financial Crowding Out

“…The task of establishing such a relationship is ambiguous and might be the reason that thwarts the analysis of this link prior to the deregulation of interest rates. However, contrary to the popular belief that an administered interest rate in developing countries is insensitive to market perceptions, the literature revealed that an administered interest rate does accommodate market signals, and in order to analyze that, the literature has suggested examining the intertemporal movement of the interest rate and its variability (Gupta 1984).…”

Is Currency Depreciation Expansionary? The Case of South Korea

“…Feldstein [15], Hoelscher [20], Cebula [7], Cebula and Cuellar [10], Cebula [8,9], Cebula, Angjellari-Dajci, and Foley [11] and others indicate that more government deficit/debt raises real interest rates and is likely to crowd out spending by households and businesses. On the other hand, McMillin [24], Gupta [17], Darrat [12,13], Findlay [16], Ostrosky [26] and others maintain that more government deficit/debt would not raise the interest rate. Tables 1 and 2 report the basic statistical analysis and the simple correlation between real GDP and the right-hand side variables.…”