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Federal Deficits and the Real Rate of Interest in the United States: A Note

Author

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  • Cebula, Richard
Abstract
This brief Note provides strong empirical evidence that federal govern­ment deficits can indeed have a positive and significant impact upon short­ term interest rates; the findings in this paper thereby establish another mechanism for the transmission of crowding out. This study differs from most other studies in the adoption of two particular procedures. First, unlike most (although not all) other related studies, the rate of interest is expressed as a real rate; this is done in simple fashion by subtracting the inflation rate (of the GNP deflator) from the nominal rate of interest (taken to be the 3 month T-bill rate). Second, also unlike most (although not all) other related studies, the deficit is expressed in real terms and then divided by the real GNP level; expressing the deficit in this ratio form enables us to judge the deficit relative to the size of the economy which must finance it. No previous related study to date has adopted both of these procedures, and most studies of this topic have adopted neither procedure.

Suggested Citation

  • Cebula, Richard, 1986. "Federal Deficits and the Real Rate of Interest in the United States: A Note," MPRA Paper 51626, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51626
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    File URL: https://mpra.ub.uni-muenchen.de/51626/1/MPRA_paper_51626.pdf
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    References listed on IDEAS

    as
    1. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    2. Mascaro, Angelo & Meltzer, Allan H., 1983. "Long- and short-term interest rates in a risky world," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 485-518, November.
    3. Makin, John H, 1983. "Real Interest, Money Surprises, Anticipated Inflation and Fiscal Deficits," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 374-384, August.
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    Cited by:

    1. Oseni O. Isiaq & Adesoye A. Bolaji, 2016. "Fiscal Policy and Term Structure of Interest Rate in Nigeria," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(2), pages 70-83, April.
    2. Oseni O. Isiaq & Adesoye A. Bolaji, 2016. "Fiscal Policy and Term Structure of Interest Rate in Nigeria," EuroEconomica, Danubius University of Galati, issue 2(12), pages 70-83, April.
    3. Samwel Mwigeka, 2016. "Do Budget Deficit Crowds Out Private Investment: A Case of Tanzanian Economy," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(6), pages 183-183, May.
    4. Spector, Lee C, 1999. "Macroeconomic Models and the Determination of Crowding Out," Public Finance = Finances publiques, , vol. 54(1-2), pages 84-98.
    5. Richard Cebula, 1988. "Crowding out, deficits, and interest rates: Reply," Public Choice, Springer, vol. 58(1), pages 95-97, July.
    6. Kanhaya Gupta, 1989. "Budget deficits and interest rates in the United States," Public Choice, Springer, vol. 60(1), pages 87-92, January.
    7. Lee Spector & T. Cott, 1988. "Crowding out, deficits, and interest rates: Comment," Public Choice, Springer, vol. 58(1), pages 91-94, July.

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    More about this item

    Keywords

    interest rate determinants; financial markets; budget deficits; crowding out;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H69 - Public Economics - - National Budget, Deficit, and Debt - - - Other

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