Federal Deficits and the Real Rate of Interest in the United States: A Note

Cebula, Richard (1986): Federal Deficits and the Real Rate of Interest in the United States: A Note. Published in: Public Choice , Vol. 53, No. 1 : pp. 97-100.

Abstract

This brief Note provides strong empirical evidence that federal govern­ment deficits can indeed have a positive and significant impact upon short­ term interest rates; the findings in this paper thereby establish another mechanism for the transmission of crowding out. This study differs from most other studies in the adoption of two particular procedures. First, unlike most (although not all) other related studies, the rate of interest is expressed as a real rate; this is done in simple fashion by subtracting the inflation rate (of the GNP deflator) from the nominal rate of interest (taken to be the 3 month T-bill rate). Second, also unlike most (although not all) other related studies, the deficit is expressed in real terms and then divided by the real GNP level; expressing the deficit in this ratio form enables us to judge the deficit relative to the size of the economy which must finance it. No previous related study to date has adopted both of these procedures, and most studies of this topic have adopted neither procedure.

• Item Type: MPRA Paper
• Language: English
• Keywords: interest rate determinants; financial markets; budget deficits; crowding out
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm; H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit ; Surplus; H - Public Economics > H6 - National Budget, Deficit, and Debt > H69 - Other

References

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