Does More Government Deficit Lead to a Higher Long-term Interest Rate? Application of an Extended Loanable Funds Model to Estonia

Yu Hsing
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Yu Hsing: Department of Business Administration & Finance, College of Business, Southeastern Louisiana University, Hammond, LA, USA

The AMFITEATRU ECONOMIC journal, 2010, vol. 12, issue 28, 650-659

Abstract: Applying and extending the open-economy loanable funds model, this article shows that more government borrowing or debt as a percent of GDP leads to a higher government bond yield, that a higher real money market rate, a higher expected inflation rate, a higher EU government bond yield, or depreciation of the Estonian kroon (EEK) would increase the Estonian government bond yield, and that the negative coefficient of the percent change in real GDP has an unexpected sign. When the conventional closed-economy or openeconomy loanable funds model is considered, the article finds that more government borrowing as a percent of GDP does not result in a higher government bond yield, that the positive coefficients of the real money market rate, the growth rate of real GDP, and the expected inflation are significant at the 1%, 5% or 10% level, and that the negative coefficient of the ratio of the net capital inflow to GDP in the conventional open-economy loanable funds model is significant at the 1% level.

Keywords: government deficits; long-term interest rates; loanable funds model; expected inflation; world interest rates; exchange rates (search for similar items in EconPapers)
JEL-codes: E43 E62 P43 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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