Government Debt and the Long-Term Interest Rate: Application of an Extended Open-Economy Loanable Funds Model to Poland

Yu Hsing
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Yu Hsing: Southeastern Louisiana University, USA

Managing Global Transitions, 2010, vol. 8, issue 3, 227-237

Abstract: This paper examines the behavior of the long-term interest rate in Poland based on a sample during 2001.Q1–2009.Q1. Both the demand for and supply of loanable funds are considered. Extending the openeconomy loanable funds model, this paper finds thatmore government debt as a percent of gdp leads to a higher long-term interest rate in Poland and that a higher real Treasury bill rate, more percent change in real GDP, a higher expected inflation rate, a higher world long-term interest rate, and depreciation of the zloty would increase the long-term interest rate in Poland. In the standard open-economy loanable funds model including the net capital inflow, the coefficient of the net capital inflow is positive and insignificant at the 10% level. Hence, the incorporation of the world interest rate and the nominal effective exchange rate in the model may better capture the behavior of the long-term interest rate in Poland.

Keywords: loanable funds model; government debt; long-term interest rates; expected inflation rates; nominal effective exchange rates (search for similar items in EconPapers)
JEL-codes: E43 E62 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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