An empirical analysis for the US of the impact of federal budget deficits and the average effective personal income tax rate on the ex post real interest rate yield on ten-year Treasuries

Richard J. Cebula, Robert Boylan


We investigate the impact of federal government budget deficits and federal personal income tax rates on the ex post real interest rate yield on ten-year US Treasury notes. Using autoregressive two-stage least squares estimations for the post-Bretton Woods era, we find that the yield on these Treasury issues has been an increasing function of the federal budget deficit as a percent of GDP, both in the form of the total/unified deficit and the primary deficit, and also an increasing function of the average effective federal personal income tax rate. The estimation reveals that growth in the M2 money supply (relative to GDP) acts to reduce the real interest rate yield on ten-year Treasuries. Consequently, while a growing money supply can help to keep real interest rates on Treasury notes (and hence federal debt service costs) down, policymakers should be sensitive to the fact that both budget deficit increases and tax rate increases can elevate the real interest rate.

JEL codes: E43, E62, H62



budget deficits; income tax rates; ex ante real interest rates; thirty-year Treasury bonds; monetary policy; open-economy loanable funds model

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