Budget Deficits and Interest Rates: A Fresh Perspective

Ari Aisen and David Hauner ()

No 08/42, IMF Working Papers from International Monetary Fund

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 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 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.

Keywords: Budget deficits; Interest rates (search for similar items in EconPapers)
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Date: 2008-02-01
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Journal Article: Budget deficits and interest rates: a fresh perspective (2013)
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