Budget deficits and short-term real interest rate forecasting

Kolluri, Bharat R.; Giannaros, Demetrios S.

doi:10.1016/s0164-0704(87)80010-1

Cited by 25 publications

(8 citation statements)

References 5 publications

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“…Further, unlike previous studies, we considered both short-term and long-term interest rates. Our results provide absolutely no support for the proposition that federal deficits affect interest rates and thus contradict the recent findings by Cebula (1987) and Kolluri and Giannaros (1987). Finally, the paper provides some further support for the 'inverted' Fisher hypothesis proposed by Carmichael and Stebbing (1983).…”

Section: Discussioncontrasting

confidence: 97%

“…These results are thus radically different from those of Cebula (1987). Kolluri-Giannaros (1987), and Makin (1983) and consistent with those of Evans (1985Evans ( , 1987. For example, unlike Cebula, there is no evidence of the effect of budget deficits on expost real short-term interest rate or on the ex-ante real interest rate as in Kolluri and Giannaros.…”

Section: The Resultssupporting

confidence: 65%

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Budget deficits and interest rates in the United States

Gupta

1989

Public Choice

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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.

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Section: Discussioncontrasting

confidence: 97%

Section: The Resultssupporting

confidence: 65%

Budget deficits and interest rates in the United States

Gupta

1989

Public Choice

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“…Turning to the empirical studies, Dwyer (1982), Plosser (1982;, Makin (1983), Hoelscher (1983), Kormendi (1983), Mascaro and Meltzer (1983), Dewald (1983), Aschauer (1985), Evans (1985;1987a;1987b), Monadjemi (1989), Giannaros and Kolluri (1989), Darrat (1989;, and Findlay (1990) have provided empirical evidence suggesting that government budget deficits have no significant effect on interest rates. In contrast, Feldstein (1982), Hutchinson and Pyle (1984), Brath et al (1985), Tanzi (1985), Hoelscher (1986), Tran and Swahney (1988), Wachtel and Young (1987), Kolluri and Giannaros (1987), Zahid (1988), Holloway (1988), Thomas and Abderrazak (1988a;1988b), Allen (1990), Cebula (1990a;, and Al-Saji (1991;, Liargovas et al, (1997) have found that large government budget deficits cause high interest rates. Part of the conflicting results can be explained by differences in the choice of variables, methodology and the sample period.…”

Section: Budget Deficit and Interest Ratesmentioning

confidence: 99%

The Budget Deficit and Economic Performance: A Survey

Saleh

Harvie

2005

Singapore Econ. Rev.

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The relationship between budget deficits and macroeconomic variables (such as growth, interest rates, trade deficit, exchange rate, among others) represents one of the most widely debated topics among economists and policy makers in both developed and developing countries. However, the purpose of this paper is to examine the extensive literature to such a relationship, concentrating on theoretical debates, empirical studies, and econometric models in order to derive substantive conclusions, which can be beneficial in terms of macroeconomics area or in terms of constructing or developing a macroeconomic model for analysing the impact of budget deficits on macroeconomic variables. The majority of these studies regress a macroeconomic variable on the deficit variable. These studies are cross-country and utilise time series data. In general the key outcomes from the studies presented in this paper indicated that both the method of financing and the components of government expenditures could have different effects. Therefore, it is crucial to distinguish between current and capital expenditure when evaluating the impact of fiscal policy on private investment and output growth. Even though, the overall results from the empirical literature with respect to the impact of public investment on private investment and growth are ambiguous, the bulk of the empirical studies finds a significantly negative effect of public consumption expenditure on growth, while the effects of public investment expenditure are found to be positive although less robust. The key outcome from all of the studies presented in this paper which investigating the relationship between the budget deficit and current account deficit showed strong evidence in both developed and developing countries towards supporting the Keynesian proposition (conventional view) which suggests that an increase in the budget deficit would induce domestic absorption and, hence import expansion, causing a current account deficit. Furthermore, it can also be concluded from the empirical findings that the effects of budget deficits on exchange rates depends on the way of funding the deficits, whether through taxation or through money growth. The key findings from the empirical studies investigating the relationship between the budget deficit and interest rates indicated strong evidence towards supporting the Keynesian model of a significant and positive relationship between budget deficits and interest rates. The major outcomes from the empirical studies examining the relationship between budget deficits and inflation showed strong evidence that the budget deficit financed through monetisation and a rising money supply could lead to inflation. * I would like to thank A/P Charles Harvie and A/P Edgar J Wilson for their helpful comments and suggestions.

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“…McMillin (1986) performs a multivariate Granger-causality test on the effects of American federal deficits on short-term interest rates, and suggests that none of the deficit measures Granger-causes the interest rate. Kolluri & Giannaros (1987), however, find that an increase in budget deficits depresses the short-term rate of interest. Swamy et al (1990) arrive at a similar conclusion.…”

Section: Interest Rates and Budget Deficits: A Literature Reviewmentioning

confidence: 94%