Budget Deficits and Interest Rates: A Fresh Perspective

21 Pages Posted: 29 Feb 2008

See all articles by Ari Aisen

Ari Aisen

International Monetary Fund (IMF) - Asia and Pacific Department; Central Bank of Chile

David Hauner

International Monetary Fund (IMF) - African Department

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Date Written: February 2008

Abstract

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, Interest rates, Fiscal policy

Suggested Citation

Aisen, Ari and Hauner, David, Budget Deficits and Interest Rates: A Fresh Perspective (February 2008). IMF Working Papers, Vol. , pp. 1-19, 2008. Available at SSRN: https://ssrn.com/abstract=1096866

Ari Aisen (Contact Author)

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

David Hauner

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

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