EconPapers    
Economics at your fingertips  
 

Do Budget Deficits Raise Interest Rates? A Survey of the Empirical Literature

Leanne Ussher ()

No 0005 Classification- JEL:, Working Papers from Department of Economics, Queens College of the City University of New York

Abstract: Do government budget deficits raise interest rates and thus “crowd out” private investment? This question has been the topic of a multitude of empirical studies, which proposed to evaluate the impact of financing government activity. We survey the theory and some empirical results. Traditional theories either support deficits having a positive or a neutral effect on interest rates. Various tests of these propositions yield diverse results, and one can find all conclusions – that deficits raise, decrease or do not effect interest rates. Also, there is little attempt to ground their assumption that rising interest rates result in a crowding out of private borrowing and investment. The problem with many of the empirical studies begins with their narrow theoretical underpinnings which are driven by assumptions of resource constraints, exogenous money supply, or government budget constraints. Alternatively, models that derive their economics from the demand side determining supply, have a transmission mechanisms missing from traditional models that may explain econometric testing incongruities. Such models take account of multi-asset markets, investment accelerators and consider the alternative causality - interest rates to budget deficits. They emphasize financial market instruments, investor behavior, and the relationship between the treasury and the central bank in determining fiscal and monetary policy. As a result, such models provide a richer understanding to the interaction between deficits and interest rates in their institutional setting.

Date: 1998-04
References: Add references at CitEc
Citations View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.qc-econ-bba.org/RePEc/pdf/0005.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:quc:wpaper:0005

Access Statistics for this paper

More papers in Working Papers from Department of Economics, Queens College of the City University of New York Contact information at EDIRC.
Bibliographic data for series maintained by Cara Marshall ().

 
Page updated 2018-07-12
Handle: RePEc:quc:wpaper:0005