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Budget deficits and interest rates: a fresh perspective

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  • Ari Aisen
  • David Hauner

Abstract

We extend the literature on budget deficits and interest rates in three ways: we examine both advanced and emerging economies and for the first time a large emerging market panel; explore interactions to explain some of the heterogeneity in the literature; and apply system Generalized Method of Moments (GMM). There is overall a highly significant positive effect of budget deficits on interest rates, but the effect depends on interaction terms and is only significant under one of the several conditions: deficits are high, mostly domestically financed, or interact with high domestic debt; financial openness is low; interest rates are liberalized; or financial depth is low.

Suggested Citation

  • Ari Aisen & David Hauner, 2013. "Budget deficits and interest rates: a fresh perspective," Applied Economics, Taylor & Francis Journals, vol. 45(17), pages 2501-2510, June.
    • Handle: RePEc:taf:applec:45:y:2013:i:17:p:2501-2510
    DOI: 10.1080/00036846.2012.667557
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