Budget Deficits and Interest Rates: A Fresh Perspective
26 Pages Posted: 30 Jan 2008
Date Written: November 9, 2007
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.
Keywords: Budget deficits, fiscal policy, interest rates
JEL Classification: E43, E62
Suggested Citation: Suggested Citation