Budget Deficits, Tax Rules, and Real Interest Rates

69 Pages Posted: 27 Apr 2000 Last revised: 5 Jan 2002

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER); Harvard University

Date Written: July 1986

Abstract

This paper examines three sources of the fluctuations in real interest rates during the past three decades: changes in budget deficits, changes in tax rules, and changes in monetary policy. The evidence indicates that budget deficits and monetary policy have had a strong influence on the level of long-term interest rates but fails to identifyany effect of changes in corporate tax rates and investment incentives.The analysis shows that it is projected future budget deficits rather than the current level of the actual or structural deficit that influence long-term interest rates. Each percentage point increase in the five-year projected ratio of budget deficits to GNP raisesthe long-term government bond rate by approximately 1.2 percentage points while the ratio of the current deficit to GNP (either actual or structural) has no significa effect. Thespecific parameter estimates imply that the increase in projected budget deficits was responsible for about two-thirds of the rise in the interest rates between 1977-78 and 1983-84.

Suggested Citation

Feldstein, Martin S., Budget Deficits, Tax Rules, and Real Interest Rates (July 1986). NBER Working Paper No. w1970. Available at SSRN: https://ssrn.com/abstract=227076

Martin S. Feldstein (Contact Author)

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