Deficits and long-term interest rates: an empirical note

Yash P. Mehra

No 92-02, Working Paper from Federal Reserve Bank of Richmond

Abstract: This note examines whether long-term nominal interest rates are cointegrated with budget deficits over the period 1959 to 1990. A key finding of this note is that long-term rates are cointegrated with deficits if a one-year ahead inflation forecast series is used to measure long-term expected inflation. However, the evidence favoring cointegration between deficits and interest rates weakens and almost disappears when inflation forecasts over longer horizons (2 to 4 years) are used. This result indicates that a one-year ahead inflation forecast series does not adequately measure long-term expected inflation. Hence, the link found between deficits and long-term rates using one-year inflation forecast series is spurious.

Keywords: Budget deficits; Interest rates (search for similar items in EconPapers)
Date: 1992
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Citations: View citations in EconPapers (7)

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