Long- and short-term interest rates in a risky world

Federal deficits and the real rate of interest in the United States: A note

“…Hence, even after allowing f or the potential role of the business cycle, it appears that f ederal budget deficits have a significant positive impact on the real rate of interest. This finding is strongly indicative of the existence of a crowding ou t mechanism and is at odds with the existi ng studies (see, f or example, Evans, 1985;Hoelscher , 1983;Makin , 1983;Mascaro and Meltzer, 1983;and Motley, 1983).…”

“…the nominal rate minus the rate of inflation .' Consistent with the af orementioned studies by Mak in (1983), Motley (1983), Hoelscher (1983), Mascaro and Meltzer (1983), and Evans (1985), we define the nominal interest rate (rnom) as the interest rate yield on 3 month T-bills. Next , we define the inflation rate (P) as the rate of inflation of the GN P deflator.…”

“…Following the studies by Evans (1985), M.aki n (1983), Motley (1983), and Mascaro and Meltzer (1983), we seek to include in ou r model independent variables (a) to represent the f ederal budget deficit and (b) to allow f or the impact of money supply changes over time. The initial model to be estimated is given by:…”

“…Based upon t he conventional wisdom , as well as the studies by Makin (1983), Motley (1983), Mascaro and Meltzer (1983), and Evans (1985), it is expected that greater monetary growth, ceteris paribus , sh ould act to reduce the interest rate:…”

“…The studies conducted by Motley (1983), Makin (1983), Hoelscher (1983), Mascaro and Meltzer (1983), and Evans (1985) have all found the 3 month Treasury bill (T-bill) rate to be essentially unaffected by federal government borrowing. This finding has led these authors to the conclusion that there is no empirical evidence of a mechanism f or the transmission of 'crowding out.…”