Large Deficits Produce High Interest Rates

Cebula, Richard and Schwartzburt, Mark and Scott, Gerald (1990): Large Deficits Produce High Interest Rates. Published in: The Indian Journal of Economics , Vol. 72, No. 234 (29 July 1991): pp. 115-119.

Abstract

Evans has argued that the federal budget deficit in the United States does not influence the real rate of interest. Indeed, Evans (1985, p. 85) goes so far as to claim that “in over a century of U.S. history, large deficits have never been associated with high interest rate”. By contrast, using two quarterly models that directly parallel Evans’ IS-LM framework, we find strong empirical evidence that the federal budget deficit does in fact raise the ex post real rate of interest. It would appear that Evans’ conclusions are questionable.

• Item Type: MPRA Paper
• Language: English
• Keywords: budget deficits; interest rates; crowding out
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General; 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 > H62 - Deficit ; Surplus

References

Evans, Paul, “Do Large Deficits Produce High Interest Rates?”, American Economic Review, March 1985, 75, 68-87.

Holloway, Thomas, “The Cyclically Adjusted Federal Budget and Federal Debt: Revised and Updated Estimates”, Survey of Current Business, March 1986, 6, 11-17.

Zahid, Khan, “Government Budget Deficits and Interest Rates: The Evidence Since 1971, Using Alternative Deficit Measures”, Southern Economic Journal, April 1988, 54, 725-31.