Government spending and interest rates

Daniel Murphy and Kieran James Walsh

Journal of International Money and Finance, 2022, vol. 123, issue C

Abstract: Most macroeconomic models imply that increases in government spending cause interest rates to rise, but empirical evidence from the U.S. generally fails to support this prediction. We propose a novel explanation for how government spending can have a zero or negative temporary effect on interest rates: the increased demand for credit associated with government spending is offset by an increase in the supply of credit due to higher aggregate income. We demonstrate this mechanism theoretically and provide evidence consistent with the model’s predictions.

Keywords: Interest Rates; Fiscal Policy; Aggregate Demand (search for similar items in EconPapers)
JEL-codes: E21 E41 E42 E43 E44 E62 F34 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:123:y:2022:i:c:s0261560622000018

DOI: 10.1016/j.jimonfin.2022.102598

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