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Impact of the Primary Budget Deficit on the Nominal Long Term Interest Rate Yield on Tax Free Municipal Bonds

Cebula, Richard and McGrath, Richard and Toma, Michael (2005): Impact of the Primary Budget Deficit on the Nominal Long Term Interest Rate Yield on Tax Free Municipal Bonds. Published in: Review of Business Research , Vol. 6, No. 1 (10 September 2006): pp. 84-92.

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Abstract

This study empirically investigates the impact of the federal budget deficit on the nominal interest rate yield on high grade long term tax free municipal bonds. Within a system that includes income tax rates, international capital flows, and the primary budget deficit, which excludes net interest payments by the Treasury, co-integration and error-correction model estimation leads to the conclusion that the primary budget deficit acted to raise this interest rate yield over the 1973-1996 study period but that the causality was not bi-directional.

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