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Budget Deficit and Interest Rates

Author

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  • Zdeněk Dvorný

Abstract

The article examines the impact of the budget deficit upon the term structure of Czech interest rates. An important feature of the model is that it enables us to directly test the predictions of the three alternative paradigms, the Keynesian, neoclassical and the Ricardian, concerning the long-term and short-term impact of deficit on interest rates. The result of the study, obtained by the IV method suggests that the budget deficit is negatively related to the interest rate level in the short-run. Therefore, the long-run Ricardian proposition cannot be rejected in favour of any alternative hypothesis.

Suggested Citation

  • Zdeněk Dvorný, 2006. "Budget Deficit and Interest Rates," Prague Economic Papers, Prague University of Economics and Business, vol. 2006(1), pages 3-13.
    • Handle: RePEc:prg:jnlpep:v:2006:y:2006:i:1:id:272:p:3-13
    DOI: 10.18267/j.pep.272
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    More about this item

    Keywords

    interest rates; budget deficit; IV estimation; GDP decomposition;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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