The differing effects of pre-and post-1981 federal budget deficits on tax-adjusted real interest rates

Abstract

A This paper employs an estimating equation relating tax-adjusted real interest rates to deficits and other economic variables to examine the differing effects of pre-and post-1981 federal budget deficits on ex ante and ex post real tax-adjusted short-term interest rates over the period 1961:l-1992:2. The results for the 1961:l-1992:2 period, taking into account a shift in the linkage between the ratio of alternative measures of the deficit to potential G D P occurring in 1981:1, indicate that the ratio of both the NIPA deficit and the cyclically adjusted deficit to potential G D P have a significant effect on ex ante and ex post real tax-adjusted interest rates for the post-1981 period, but no significant effect before 1981.