Budget Deficits, Oil Prices and Interest Rates

Abstract

The study investigates the effect of budget deficits, economic growth, money supply and the price of oil on interest rates. We develop a theoretical framework to show how interest rates are determined. We test our model using quarterly data in the United States, Canada and Germany, seeking to explain both short-term and long-term interest rates. The results show that, generally, interest rates are not affected by changes in budget deficits, lending (qualified) empirical support to the Ricardian equivalence proposition. We also determine the effects of GDP growth, money supply and the price of oil on short-term and long-term interest rates in the three countries.