Kitchen, John (2002): A Note on Interest Rates and Structural Federal Budget Deficits.
Download (185kB) | Preview
This paper provides evidence on the response of interest rates to Federal budget deficits. A simple model is presented that incorporates the role of monetary policy in the determination of short-run interest rates and that ascribes the effects of government budget imbalances on the term structure of interest rates to uncertainty about the expected evolution of inflation and real interest rates. Empirical results support the view that the term structure of interest rates is affected by Federal budget deficits, with a significant positive response of intermediate- and long-term interest rates relative to short-term rates in response to budget deficits.
|Item Type:||MPRA Paper|
|Original Title:||A Note on Interest Rates and Structural Federal Budget Deficits|
|Keywords:||interest rates; deficit; budget|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects
H - Public Economics > H6 - National Budget, Deficit, and Debt
|Depositing User:||John Kitchen|
|Date Deposited:||04. Mar 2010 10:54|
|Last Modified:||13. Feb 2013 05:09|
Barro, Robert J., "The Neoclassical Approach to Fiscal Policy," in Robert J. Barro, ed., Modern Business Cycle Theory, Harvard University Press, Cambridge, 1989, 178-235.
Bernheim, Douglas, "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Macroeconomics Annual, 1987, 2, 263-315.
Congressional Budget Office, “The Congressional Budget Resolution and the Economic Effects of Balancing the Budget,” The Economic and Budget Outlook: An Update, August 1995.
Congressional Budget Office, “The Standardized and Cyclically Adjusted Budgets: Updated Estimates,” September 2002.
Council of Economic Advisers, Economic Report of the President, February 1994.
Cebula, Richard J. and Koch, James V., “Federal Budget Deficits, Interest Rates, and International Capital Flows: A Further Note,” Quarterly Review of Economics and Finance, v34, n1 (Spring 1994): 117-20.
Canzoneri, Matthew B., Dumby, Robert E., and Diba, Behzad T., “Should the European Central Bank and the Federal Reserve Be Concerned About Fiscal Policy? September 2002.
Elmendorf, Douglas W., “The Effect of Deficit-Reduction Laws on Real Interest Rates,” Board of Governors of the Federal Reserve System, Finance and Economics, Discussion Series: 96/44, 1996.
Evans, Charles L. "Real-Time Taylor Rules and the Federal Funds Futures Market." Federal Reserve Bank of Chicago Economic Perspectives (Third Quarter 1998), pp. 44-55.
Evans, Paul, “Do Large Deficits Produce High Interest Rates?” American Economic Review, March 1985.
Evans, Paul, “Is the Dollar High Because of Large Deficits?” Journal of Monetary Economics, 18, 1986, 227-249.
Evans, Paul, "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, February 1987 (a).
Evans, Paul, "Do Budget Deficits Raise Nominal Interest Rates," Journal of Monetary Economics, 20, 1987 (b), 281-300.
Hoelscher, Gregory, "New Evidence on Deficits and Interest Rates," Journal of Money, Credit, and Banking, February 1986.
Kitchen, John, "Domestic and International Financial Market Responses to Federal Deficit Announcements," Journal of International Money and Finance, April 1996, 15: 239-254.
Miller, Stephen M. and Russek, Frank S., “The Temporal Causality between Fiscal Deficits and Interest Rates,” Contemporary Policy Issues, v9, n3 (July 1991): 12-23
Miller, Stephen M. and Russek, Frank S., “Do Federal Deficits Affect Interest Rates? Evidence from Three Econometric Methods,” Journal of Macroeconomics, v18, n3 (Summer 1996): 403-28.
Orphanides, Athanasios. "Monetary Rules Based on Real-Time Data." American Economic Review, 2001.
Plosser, Charles, "Fiscal Policy and the Term Structure," Journal of Monetary Economics, 20, 1987.
Romer, Christina D., “A Rehabilitation of Monetary Policy in the 1950s,” NBER Working Paper W8800, February 2002.
Seater, John J., "Ricardian Equivalence," Journal of Economic Literature, March 1993, 31, 142-190.
Taylor, John, “Discretion Versus Policy Rules in Practice,” Carnegie Rochester Series on Public Policy, 39, 1993: 195-214.
Thorbecke, Willem, "Why Deficit News Affects Interest Rates," Journal of Policy Modeling, February 1993, 15: 1-11.
Wachtel, Paul and Young, John, "Deficit Announcements and Interest Rates," American Economic Review, December 1987, 77: 1007-1012.
Woodford, Michael, “Fiscal Requirements for Price Stability,” Journal of Money, Credit, and Banking, Vol. 33, No. 3, August 2001: 669-728.
Zimmerman, Jeffrey, “Debt, Deficits, and Long-Term Rates,” Studies in Economics and Finance, Vol. 17, No. 2, Spring 1997: 63-80.