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An Empirical Investigation into the Impact of U.S. Federal Government Budget Deficits on the Real Interest Rate Yield on Intermediate-term Treasury Debt Issues, 1972-2012

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  • Cebula, Richard

Abstract

The existence of large federal budget deficits in the U.S., especially in recent years, raises the specter of concern regarding their potential effects on real interest rates (as well as economic growth and capital formation). This study provides current and new empirical evidence on the impact of the federal budget deficit on the real interest rate yields on intermediate-term debt issues of the U.S. Treasury, represented herein by the ex post real interest rate yields on three-year Treasury notes and seven-year Treasury notes, two interest rate measures that have received essentially no attention in the economics and finance literature in recent years. The study is couched within a loanable funds model that includes two ex post real interest rate yields, the monetary base as a percent of GDP, the change in per capita real GDP, net financial capital inflows as a percent of GDP, and the budget deficit as a percent of GDP. This study uses annual data for the study period 1972-2012, a time period that includes “quantitative easing” monetary policies by the Federal Reserve. Two-stage least squares estimations reveal that the federal budget deficit, expressed as a percent of GDP, has exercised a positive and statistically significant impact on the ex post real interest rate yields on both three-year and seven-year Treasury notes, even after allowing for quantitative easing and other factors. The study also considers the 1980-2012 time period and offers simple robustness testing.

Suggested Citation

  • Cebula, Richard, 2014. "An Empirical Investigation into the Impact of U.S. Federal Government Budget Deficits on the Real Interest Rate Yield on Intermediate-term Treasury Debt Issues, 1972-2012," MPRA Paper 55269, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:55269
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    References listed on IDEAS

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    1. Richard Cebula & Pablo Cuellar, 2010. "Recent evidence on the impact of government budget deficits on the ex ante real interest rate yield on Moody’s Baa-rated corporate bonds," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 34(3), pages 301-307, July.
    2. Keith M. Carlson & Roger W. Spencer, 1975. "Crowding out and its critics," Review, Federal Reserve Bank of St. Louis, vol. 57(Dec), pages 2-17.
    3. Richard J. Cebula, 2013. "An exploratory inquiry into the impact of budget deficits on the nominal interest rate yield on Moody's Aaa-rated corporate bonds, 1973--2012," Applied Economics Letters, Taylor & Francis Journals, vol. 20(16), pages 1497-1500, November.
    4. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    5. Vito Tanzi, 1985. "Fiscal Deficits and Interest Rates in the United States: An Empirical Analysis, 1960-84 (Déficits budgétaires et taux d'intérêt aux Etats-Unis: analyse empirique, 1960-84) (El déficit fiscal y la," IMF Staff Papers, Palgrave Macmillan, vol. 32(4), pages 551-576, December.
    6. Cebula, Richard, 1996. "An Empirical Note on the Impact of the Federal Budget Deficit on Ex Ante Real Long-Term, Interest Rates, 1973-1995," MPRA Paper 51414, University Library of Munich, Germany.
    7. James R. Barth & George Iden & Frank S. Russek, 1984. "Do Federal Deficits Really Matter?," Contemporary Economic Policy, Western Economic Association International, vol. 3(1), pages 79-95, September.
    8. Barth, James R & Iden, George & Russek, Frank S, 1986. "Government Debt, Government Spending, and Private Sector Behavior: Comment," American Economic Review, American Economic Association, vol. 76(5), pages 1158-1167, December.
    9. R.J. Cebula, 1997. "Government deficit, ex post real long-term interest rates and causality," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 50(202), pages 325-336.
    10. Cebula, Richard J & Belton, Willie J, 1993. "Government Budget Deficits and Interest Rates in the United States: Evidence for Closed and Open Systems Put into Perspective, 1955-1989," Public Finance = Finances publiques, , vol. 48(2), pages 188-209.
    11. Richard J. Cebula, 2005. "Recent empirical evidence on the impact of the primary budget deficit on nominal longer term treasury note interest rate yields," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 7(1), pages 47-58.
    12. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    13. Cebula, Richard J. & Koch, James V., 1994. "Federal budget deficits, interest rates, and international capital flows: A further note," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(1), pages 117-120.
    14. James R. Barth, 1991. "The Great Savings and Loan Debacle," Books, American Enterprise Institute, number 918256, September.
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    Cited by:

    1. Hsing Yu, 2017. "Is Real Depreciation or More Government Deficit Expansionary? The Case of Slovenia," South East European Journal of Economics and Business, Sciendo, vol. 12(1), pages 50-56, April.
    2. Liu Kerry, 2023. "The Effects of Foreign Participation on Chinese Government Bond Yields," Folia Oeconomica Stetinensia, Sciendo, vol. 23(2), pages 222-240, December.
    3. Yu Hsing, 2020. "Impacts of Real Depreciation and Appreciation on Aggregate Output in Taiwan," The American Economist, Sage Publications, vol. 65(1), pages 123-130, March.
    4. Tanweer Akram & Syed Al-Helal Uddin, 2021. "An empirical analysis of long-term Brazilian interest rates," PLOS ONE, Public Library of Science, vol. 16(9), pages 1-20, September.
    5. Tanweer Akram, 2021. "A Note Concerning the Dynamics of Government Bond Yields," The American Economist, Sage Publications, vol. 66(2), pages 323-339, October.

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    More about this item

    Keywords

    budget deficits; real three-year Treasury yield; real seven-year Treasury yield; quantitative easing;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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