A contemporary investigation of causality between the primary government budget deficit and the ex ante real long term interest rate in the US

Richard J. Cebula

Abstract


Using error-correction model (ECM) estimation, this study empirically examines, for theUS, the causality relationship between the federal government budget deficitand the ex ante real long term interest rate. The system includes personal federal income tax rates, the M2 money supply, the unemployment rate, an ex ante realshort term interest rate and net international capital inflows. To clarify the deficit/interest rate relationship, the budget deficit is measured by the primary deficit, which excludes net interest payments by the Treasury. The ECM estimates in this study provide results that suggest a bi-directional relationship between the primary budget deficit and the ex ante real long term interest rate yield.

 

JEL Codes: E43, H62, E62


Keywords


Budget, Deficit, Interest Rates, Interest, Money Supply, Money, Supply, Tax

Full Text:

PDF

References


AL-SAJI, A.K. (1993), "Government budget deficits, nominal and ex ante real long term interest rates in the U.K.: 1960.1-1990.2", Atlantic Economic Journal, vol. 21, pp. 71-77.

BARTH, J.R., G. IDEN and F.S. RUSSEK (1984), "Do federal deficits really matter?", Contemporary Policy Issues, vol. 3, pp. 79-95.

BARTH, J.R., G. IDEN and F.S. RUSSEK (1985), "Federal borrowing and short term in­terest rates: comment", Southern Economic Journal, vol. 52, pp. 554-59.

BARTH, J.R., G. IDEN and F.S. RUSSEK and M. WOHAR (1989), "Effects of federal budget deficits on interest rates and the composition of domestic output", The Urban Institute, vol. 1, pp. 87.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM (1973-2000).

BROOKINGS INSTITUTION, URBAN INSTITUTE (2002), Tax Facts.

BUREAU OF LABOR STATISTICS (2002).

CARLSON, K.M. and R.W. SPENCER (1975), "Crowding out and its critics", Federal Reserve Bank of St. Louis Review, vol. 60, pp. 1-19.

CEBULA, R.J. (1985), "The 'crowding out' effect of fiscal policy", Kyklos, vol. 38, pp. 435-38.

CEBULA, R.J. (1988), "Federal government budget deficits and interest rates: an analy­ sis for the United States, 1955-1984", Public Finance/Finances Publiques, vol. 43, pp. 337-48.

CEBULA, R.J. (1992), "Central government budget deficits and ex ante real long term interest rates in Italy: an empirical note for 1955-1989", Metroeconomica, vol. 43, pp. 397-402.

CEBULA, R.J. (1994), "An empirical analysis of the impact of government and tax auditing policies on the size of the underground economy: the case of the United States", American Journal of Economics and Sociology, vol. 56, pp. 173-86.

CEBULA, R.J. (1997), "An empirical note on the impact of the federal budget deficit on ex ante real long-term interest rates, 1973-1995", Southern Economic Journal, vol. 63, pp. 1094-99.

CEBULA, R.J. (1997), "Government budget deficits, ex post real long-term interest rates and causality", Banca Nazionale del Lavoro Quarterly Review, vol. 51, pp. 325-36.

CEBULA, R.J. (2000), "The impact of structural budget deficits on commercial bank interest rates: reply", Public Finance Review, vol. 28, pp. 195-98.

CEBULA, R.J. and W.J. BELTON (1993), "Government budget deficits and interest rates in the United States: evidence for closed and open economies put into perspec­tive", Public Finance/Finances Publiques, vol. 48, pp. 188-209.

CEBULA, R.J. and R. RHODD (1993), "A note on budget deficits, debt service pay­ments, and interest rates", Quarterly Review of Economics and Finance, vol. 33, pp. 439-45.

CEBULA, R.J. and I.S. SALTZ (1998), "Ex ante real long-term interest rates and U.S. federal budget deficits: preliminary error-correction evidence, 1971-1991", Economia Internazionale, vol. 51, pp. 163-69.

COUNCIL OF ECONOMIC ADVISORS (1974-2002), Economic Report of the President, 1974;…;2002, U.S. Government Printing Office, Washington.

CUKIERMAN, A. and A.H. MELTZER (1989), "A political theory of government debt and deficits in a Neo-Ricardian framework", American Economic Review, vol. 79, pp. 713-32.

DARRAT, A.F. (2000), "Do structural budget deficits impact commercial bank interest rates? A comment", Public Finance Review, vol. 28, pp. 197-94.

EVANS, P. (1985), "Do large deficits produce high interest rates?", American Economic Review, vol. 75, pp. 68-87.

EVANS, P. (1987), "Interest rates and expected future deficits in the United States", Journal of Political Economy, vol. 95, pp. 34-55.

FEIGE, E.L. (1994), "The underground economy and the currency enigma", Public Finance/Finances Publiques, vol. 49, pp. 119-36.

FELDSTEIN, M. and O. ECKSTEIN (1970), "The fundamental determinants of the interest rate", Review of Economics and Statistics, vol. 52, pp. 362-75.

FINDLAY, D.W. (1990), "Budget deficits, expected inflation, and short-term real interest rates", International Economic Journal, vol. 4, pp. 41-53.

HOELSCHER, G. (1983), "Federal borrowing and short term interest rates", Southern Economic Journal, vol. 50, pp. 319-33.

HOELSCHER, G. (1986), "New evidence on deficits and interest rates", Journal of Money, Credit and Banking, vol. 18, pp. 1-17.

HOLLOWAY, T.M. (1986), "The cyclically adjusted federal budget and federal debt: revised and updated estimates", Survey of Current Business, vol. 66, pp. 11-17.

HOLLOWAY, T.M. (1988), "The relationship between federal deficit/debt and interest rates", American Economist, vol. 32, pp. 29-38.

JOHANSEN, S. (1990), "Maximum likelihood estimation and inference on cointegration – with applications to the demand for money", Oxford Bulletin of Economics and Statistics, vol. 54, pp. 169-210.

JOHNSON, C.F. (1992), "An empirical note on interest rate equations", Quarterly Review of Economics and Finance, vol. 32, pp. 141-47.

MASCARO, A. and A.H. MELTZER (1983), "Long and short term interest rates in a risky world", Journal of Monetary Economics, vol. 20, pp. 151-200.

MCMILLIN, W.D. (1986), "Federal deficits and short term interest rates", Journal of Macroeconomics, vol. 8, pp. 403-22.

OSTROSKY, A.L. (1990), "Federal budget deficits and interest rates: comment", Southern Economic Journal, vol. 56, pp. 802-03.

PENNER, R.G. (1987), "Government deficits: the case of the United States", in M.J. Boskin and J.S. Flemming eds, Private Saving and Public Debt, Basil Blackwell, New York, pp. 105-25.

SWAMY, P.A.V.B., B.R. KOLLURI and R.N. SINGAMSETTI (1990), "What do regressions of interest rates on deficits imply?", Southern Economic Journal, vol. 56, pp. 1010­ 28.

TANZI, V. (1982), The Underground Economy in the United States and Abroad, Lexington Books, Lexington.

TANZI, V. (1983), "The underground economy in the United States: annual estimates, 1930-1980", IMF Staff Papers, vol. 30, pp. 283-305.

TANZI, V. (1985), "Fiscal deficits and interest rates in the United States", IMF Staff Papers, vol. 32, pp. 551-76.

THIES, C. (1986), "Business price expectations, 1947-84", Journal of Money, Credit and Banking, vol. 18, pp. 336-54.

ZAHID, K. (1988), "Government budget deficits and interest rates: the evidence since 1971, using alternative deficit measures", Southern Economic Journal, vol. 54, pp. 725-31.


Refbacks

  • There are currently no refbacks.


Copyright (c) 2016 Richard J. Cebula

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

 

 

Sponsored by   


ISSN 2037-3643


Reg. Tribunale di Roma n.377/2009 del 19/11/2009