 Deficit-related explanations for the US interest rate conundrumHarrison Hartman Applied Economics Letters, 2007, vol. 14, issue 4, 261-265 Abstract: This study offers two potential explanations related to the United States federal budget deficit for the recent interest-rate puzzle in the USA where long-term rates have fallen while short-term rates have risen. A VAR quantifies the relationships between real deficits, real GDP growth rates and ex ante real long-term rates. Impulse-response functions show the assumed time-invariant responses of real GDP and long-term real interest rates to a one-standard-deviation increase in the real deficit, providing some support for the crowding out theory but possibly also the crowding in theory in the short term. Findings include that expectations of future deficits could impact real interest rates today. This study notes that the interest-rate impact of expected changes in deficits is unclear because the changes in rates due to changes in (1) federal borrowing and (2) forecasted GDP growth would be in opposite directions, assuming that crowding out occurs at some point. Thus, it is not clear whether reductions in long-term rates imply that people expect larger or smaller budget deficits in the future. Date: 2007 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:14:y:2007:i:4:p:261-265 Ordering information: This journal article can be ordered from DOI: 10.1080/13504850500447422 Access Statistics for this article Applied Economics Letters is currently edited by Anita Phillips More articles in Applied Economics Letters from Taylor & Francis Journals |
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