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Does More Government Deficit Lead to a Higher Long-term Interest Rate? Application of an Extended Loanable Funds Model to Estonia

Author

Listed:
  • Yu Hsing

    (Department of Business Administration & Finance, College of Business, Southeastern Louisiana University, Hammond, LA, USA)

Abstract

Applying and extending the open-economy loanable funds model, this article shows that more government borrowing or debt as a percent of GDP leads to a higher government bond yield, that a higher real money market rate, a higher expected inflation rate, a higher EU government bond yield, or depreciation of the Estonian kroon (EEK) would increase the Estonian government bond yield, and that the negative coefficient of the percent change in real GDP has an unexpected sign. When the conventional closed-economy or openeconomy loanable funds model is considered, the article finds that more government borrowing as a percent of GDP does not result in a higher government bond yield, that the positive coefficients of the real money market rate, the growth rate of real GDP, and the expected inflation are significant at the 1%, 5% or 10% level, and that the negative coefficient of the ratio of the net capital inflow to GDP in the conventional open-economy loanable funds model is significant at the 1% level.

Suggested Citation

  • Yu Hsing, 2010. "Does More Government Deficit Lead to a Higher Long-term Interest Rate? Application of an Extended Loanable Funds Model to Estonia," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 12(28), pages 650-659, June.
    • Handle: RePEc:aes:amfeco:v:12:y:2010:i:28:p:650-659
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    References listed on IDEAS

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    1. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
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    5. Evans, Paul, 1988. "Are Government Bonds Net Wealth? Evidence for the United States," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 551-566, October.
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    Cited by:

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    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

    government deficits; long-term interest rates; loanable funds model; expected inflation; world interest rates; exchange rates;
    All these keywords.

    JEL classification:

    • P43 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Finance; Public Finance
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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