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Budget Deficit and Interest Rates: Is There a Link? International Evidence

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  • Correia-Nunes, Jose
  • Stemitsiotis, Loukas

Abstract

This paper addresses the question whether high nominal and real long-term interest rates are associated with larger budget deficits. The authors use a loanable funds model framework that allows the combination of the characteristics of the term-structure, with policy variables, influencing long-term interest rates. The paper brings a different perspective to empirical investigations by using a specific econometric approach that combines rational expectations with sticky prices and slow adjustment. The regression results show that the linkage between large deficits and high interest rates is statistically strong and robust during the 1970-93 period for ten major industrial countries and at the world level. Copyright 1995 by Blackwell Publishing Ltd

Suggested Citation

  • Correia-Nunes, Jose & Stemitsiotis, Loukas, 1995. "Budget Deficit and Interest Rates: Is There a Link? International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 425-449, November.
    • Handle: RePEc:bla:obuest:v:57:y:1995:i:4:p:425-49
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