Current Evidence on the Impact of Budget Deficits on the Nominal Interest Rate Yield on Intermediate-term Debt Issues of the U.S. Treasury: An Analysis with Robustness Tests

Cebula, Richard (2014): Current Evidence on the Impact of Budget Deficits on the Nominal Interest Rate Yield on Intermediate-term Debt Issues of the U.S. Treasury: An Analysis with Robustness Tests.

Abstract

This study provides new empirical evidence on the impact of the budget deficit on the nominal interest rate yield on intermediate-term debt issues of the U.S. Treasury, represented in this study by the nominal interest rate yield on ten-year Treasury notes. The study is couched within an open-economy loanable funds model that includes an ex ante real short-term real interest rate yield, an ex ante real long-term interest rate yield, the monetary base as a percent of GDP, expected future inflation, the percentage growth rate of real GDP, net financial capital inflows, and other variables. This study uses annual data and then uses quarterly data for the periods 1971-2008 and 1971-2012. The latter of these two study periods includes “quantitative easing” monetary policies by the Federal Reserve. Two-stage least squares estimations reveal that the federal budget deficit, expressed as a percent of GDP, has exercised a positive and statistically significant impact on the nominal interest rate yield on ten-year Treasury notes, even after allowing for quantitative easing and other factors. Robustness tests are provided in an Appendix.

• Item Type: MPRA Paper
• Language: English
• Keywords: nominal interest rate yield; ten-year Treasury notes; budget deficits
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit ; Surplus; H - Public Economics > H6 - National Budget, Deficit, and Debt > H68 - Forecasts of Budgets, Deficits, and Debt

References

Cebula, R.J. (1997). An empirical analysis of the impact of government tax and auditing policies on the size of the underground economy. American Journal of Economics and Sociology, 56: 173-186.

Cebula, R.J. (1992). Central government budget deficits and ex ante real long-term interest rates in Italy: an empirical analysis for 1955-1989. Metroeconomica, 43: 393-402.

Cebula, R.J. (1985). The crowding out effect of fiscal policy. Kyklos, 38: 435-438.

Cebula, R.J. (1997). An empirical note on the impact of the federal budget deficit on ex ante real long-term interest rates, 1973-1995. Southern Economic Journal, 63: 1094-1099.

Cebula, R.J. (2005). Recent evidence on the impact of the primary deficit on nominal longer-term treasury note interest rate yields. Global Business & Economics Review, 7: 47-58.

Cebula, R.J., Belton, W.J. (1993). Government budget deficits and interest rates in the United States: Evidence for closed and open economies put into perspective. Public Finance/Finances Publiques, 48: 188-209.

Cebula, R.J., Cuellar, P. (2010). Recent evidence on the impact of government budget deficits on the ex ante real interest rate yield on Moody’s Baa-rated corporate bonds. Journal of Economics and Finance, 34: 301-307.

Council of Economic Advisors. (2013). Economic report of the president, 2013. Washington, D.C: U.S. Government Printing Office.

Feldstein, M., Eckstein, O. (1970). The fundamental determinants of the interest rate. Review of Economics and Statistics, 52: 362-375.

Findlay, D.W. (1990). Budget deficits, expected inflation, and short-term real interest rates. International Economic Journal, 4: 41-53.

Gale, W., Orszag, P. (2003). Economic effects of sustained budget deficits. National Tax Journal, 49: 151-164.

Gissey, W. (1999). Net Treasury borrowing and interest rate changes. Journal of Economics and Finance, 23: 211-219.

Hoelscher, G. (1986). New evidence on deficits and interest rates. Journal of Money, Credit and Banking, 18: 1-17.

Holloway, T.M. (1986). The cyclically adjusted federal budget and federal debt: Revised and updated estimates. Survey of Current Business, 66: 11-17.

Holloway, T.M. (1988). The relationship between federal deficit/debt and interest rates. The American Economist, 32: 29-38.

Johnson, C.F. (1992). An empirical note on interest rate equations. Quarterly Review of Economics and Finance, 32: 141-147.

Kiani, K.M. (2009). Federal budget deficits and long-term interest rates in the USA. Quarterly Review of Economics and Finance, 34: 301-307.