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

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  • Cebula, Richard
  • McGrath, Richard
  • Toma, Michael
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.

Suggested Citation

  • Cebula, Richard & McGrath, Richard & Toma, Michael, 2005. "Impact of the Primary Budget Deficit on the Nominal Long Term Interest Rate Yield on Tax Free Municipal Bonds," MPRA Paper 61411, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:61411
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    References listed on IDEAS

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    1. Bharat R. Kolluri & Rao N. Singamesetti & P. A. V. B. Swamy, 1988. "What do regressions of interest rates on deficits imply?," Finance and Economics Discussion Series 3, Board of Governors of the Federal Reserve System (U.S.).
    2. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    3. James R. Barth & George Iden & Frank S. Russek, 1984. "Do Federal Deficits Really Matter?," Contemporary Economic Policy, Western Economic Association International, vol. 3(1), pages 79-95, September.
    4. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    5. Cebula, Richard J & Belton, Willie J, 1993. "Government Budget Deficits and Interest Rates in the United States: Evidence for Closed and Open Systems Put into Perspective, 1955-1989," Public Finance = Finances publiques, , vol. 48(2), pages 188-209.
    6. Cukierman, Alex & Meltzer, Allan H, 1989. "A Political Theory of Government Debt and Deficits in a Neo-Ricardian Framework," American Economic Review, American Economic Association, vol. 79(4), pages 713-732, September.
    7. Cebula, Richard J, 1988. "Federal Government Budget Deficits and Interest Rates: An Empirical Analysis for the United States, 1955-1984," Public Finance = Finances publiques, , vol. 43(3), pages 337-348.
    8. Cebula, Richard J. & Bates, Kimberly & Marks, Louise & Roth, Allison, 1988. "Federal Government Budget Deficits and Interest Rates in the United States: An Empirical Analysis," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 41(1-2), pages 1-7.
    9. Keith M. Carlson & Roger W. Spencer, 1975. "Crowding out and its critics," Review, Federal Reserve Bank of St. Louis, vol. 57(Dec), pages 2-17.
    10. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-136.
    11. Cebula, Richard, 1996. "An Empirical Note on the Impact of the Federal Budget Deficit on Ex Ante Real Long-Term, Interest Rates, 1973-1995," MPRA Paper 51414, University Library of Munich, Germany.
    12. Feldstein, Martin S & Eckstein, Otto, 1970. "The Fundamental Determinants of the Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 363-375, November.
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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.

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    More about this item

    Keywords

    primary deficit; tax free interest rate; crowding out;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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