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An Investigation into the Impact of Federal Government Budget Deficits on the Ex Ante Real Interest Rate Yield on Treasury Notes in the U.S.

Cebula, Richard (2014): An Investigation into the Impact of Federal Government Budget Deficits on the Ex Ante Real Interest Rate Yield on Treasury Notes in the U.S.

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Abstract

Using four decades of data, this empirical study adopts a loanable funds model to investigate the impact of the federal government budget deficit in the U.S. on the ex ante real interest rate yield on ten-year Treasury notes. For the 40-year period 1973-2012, an autoregressive 2SLS estimate finds that the ex ante real interest rate yield on ten-year U.S. Treasury notes was an increasing function of the ex ante real interest rate yield on Moody’s Aaa-rated corporate bonds, the ex ante real interest rate yield on three-month Treasury bills, and the increase in per capita real GDP, while being a decreasing function of net capital inflows (as a percent of GDP), which are treated as endogenous, and the monetary base (as a percent of GDP). In addition, it is found that that the federal budget deficit (relative to the GDP level) exercised a positive and statistically significant impact on the ex ante real interest rate yield on ten-year Treasury notes, a finding consistent in principle with a number of prior studies of other interest rate measures during shorter and earlier time periods. A modest robustness test using the ex ante real seven-year Treasury note yield generates the same conclusions.

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