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Budget Deficits and Interest Rates: A Fresh Perspective

Author/Editor: Aisen, Ari | Hauner, David
Authorized for Distribution: February 1, 2008
Electronic Access: Free Full Text (PDF file size is 254KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: We extend the literature on budget deficits and interest rates in three ways: we examine both advanced and emerging economies and for the first time a large emerging market panel; explore interactions to explain some of the heterogeneity in the literature; and apply system GMM. There is overall a highly significant positive effect of budget deficits on interest rates, but the effect depends on interaction terms and is only significant under one of several conditions: deficits are high, mostly domestically financed, or interact with high domestic debt; financial openness is low; interest rates are liberalized; or financial depth is low.
 
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Series: Working Paper No. 08/42
Subject(s): Budget deficits | Interest rates | Fiscal policy
Author's keyword(s): Budget deficits | fiscal policy | interest rates | system GMM
 
English  
    Published:   February 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008042   Pages:   19
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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