Munich Personal RePEc Archive

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.

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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.

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