On the Nominal Interest Rate Yield Response to Net Government Borrowing in the U.S.: An Empirical Analysis with Robustness Tests

Alexander, Gigi and Foley, Maggie (2014): On the Nominal Interest Rate Yield Response to Net Government Borrowing in the U.S.: An Empirical Analysis with Robustness Tests.

Abstract

This study provides current empirical evidence on the impact of net U.S. government borrowing (budget deficits) on the nominal interest rate yield on ten-year Treasury notes. The model 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. Autoregressive two-stage least squares estimates imply that the federal budget deficit, expressed as a percent of GDP, exercises a positive and statistically significant impact on the nominal interest rate yield on ten-year Treasury notes. Robustness tests are provided in an Appendix.

• Item Type: MPRA Paper
• Language: English
• Keywords: nominal interest; net government borrowing
• 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; H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit ; Surplus; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

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