Current Evidence on the Impact of Budget Deficits on the Nominal Interest Rate Yield on Intermediate-term Debt Issues of the U.S. Treasury: An Analysis with Robustness Tests

Richard Cebula ()

MPRA Paper from University Library of Munich, Germany

Abstract: This study provides new empirical evidence on the impact of the budget deficit on the nominal interest rate yield on intermediate-term debt issues of the U.S. Treasury, represented in this study by the nominal interest rate yield on ten-year Treasury notes. The study is couched within an open-economy loanable funds model that includes an ex ante real short-term real interest rate yield, an ex ante real long-term interest rate yield, the monetary base as a percent of GDP, expected future inflation, the percentage growth rate of real GDP, net financial capital inflows, and other variables. This study uses annual data and then uses quarterly data for the periods 1971-2008 and 1971-2012. The latter of these two study periods includes “quantitative easing” monetary policies by the Federal Reserve. Two-stage least squares estimations reveal that the federal budget deficit, expressed as a percent of GDP, has exercised a positive and statistically significant impact on the nominal interest rate yield on ten-year Treasury notes, even after allowing for quantitative easing and other factors. Robustness tests are provided in an Appendix.

Keywords: nominal interest rate yield; ten-year Treasury notes; budget deficits (search for similar items in EconPapers)
JEL-codes: E43 E52 E62 H62 H68 (search for similar items in EconPapers)
Date: 2014-05-12
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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