A New Approach in Analyzing the Effect of Deficit Announcements of Interest Rates

Quigley, Michael Regan; Porter‐Hudak, Susan

doi:10.2307/2077954

Cited by 19 publications

(9 citation statements)

References 6 publications

(5 reference statements)

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“…If news concerning federal government deficits occasionally leads to significant movements in bond market prices, then standard time-series techniques may have little power to identify these occasional, possibly nonlinear events. Previous economic research that has analyzed the effects of news announcements about federal government deficits on interest rates (Wachtel and Young, 1987;Thorbecke, 1993;Quigley and Porter-Hudak, 1994;Kitchen, 1996), have generally found only small or transitory effects. Elmendorf (1996) found that higher expected federal deficits and government spending tended to raise interest rates, but his methodology does not provide evidence of the magnitude of the effect.…”

Section: Review Of Previous Studiesmentioning

confidence: 98%

Federal Government Debt and Interest Rates

Engen¹,

Hubbard²

2004

NBER Macroeconomics Annual

206

116

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Section: Review Of Previous Studiesmentioning

confidence: 98%

Federal Government Debt and Interest Rates

Engen¹,

Hubbard²

2004

NBER Macroeconomics Annual

206

116

View full text Add to dashboard Cite

“…If news concerning federal government deficits occasionally leads to significant movements in bond market prices then standard time-series techniques may have little power to identify these occasional, possibly nonlinear, events. Previous economic research that has analyzed the effects of news announcements about federal government deficits on interest rates (Wachtel and Young, 1987;Thorbecke, 1993;Quigley and Porter-Hudak, 1994;Kitchen, 1996), have generally found only small or transitory effects. Elmendorf (1996) found that higher expected federal deficits and government spending tended to raise interest rates, but his methodology does not provide evidence of the magnitude of the effect.…”

Section: B Review Of Previous Studiesmentioning

confidence: 99%

Federal Government Debt and Interest Rates

Engen¹,

Hubbard²

2004

156

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Does government debt affect interest rates? Despite a substantial body of empirical analysis, the answer based on the past two decades of research is mixed. While many studies suggest, at most, a single-digit rise in the interest rate when government debt increases by one percent of GDP, others estimate either much larger effects or find no effect. Comparing results across studies is complicated by differences in economic models, definitions of "government debt" and "interest rates," econometric approaches, and sources of data. Using a standard set of data and a simple analytical framework, we reconsider and add to empirical evidence on the effect of federal government debt and interest rates. We begin by deriving analytically the effect of government debt on the real interest rate and find that an increase in government debt equivalent to one percent of GDP would be predicted to increase the real interest rate by about two to three basis points. While some existing studies estimate effects in this range, others find larger effects. In almost all cases, these larger estimates come from specifications relating federal deficits (as opposed to debt) and the level of interest rates or from specifications not controlling adequately for macroeconomic influences on interest rates that might be correlated with deficits. We present our own empirical analysis in two parts. First, we examine a variety of conventional reduced-form specifications linking interest rates and government debt and other variables. In particular, we provide estimates for three types of specifications to permit comparisons among different approaches taken in previous research; we estimate the effect of: an expected, or projected, measure of federal government debt on a forward-looking measure of the real interest rate; an expected, or projected, measure of federal government debt on a current measure of the real interest rate; and a current measure of federal government debt on a current measure of the real interest rate. Most of the statistically significant estimated effects are consistent with the prediction of the simple analytical calculation. Second, we provide evidence using vector autoregression analysis. In general, these results are similar to those found in our reduced-form econometric analysis and consistent with the analytical calculations. Taken together, the bulk of our empirical results suggest that an increase in federal government debt equivalent to one percent of GDP, all else equal, would be expected to increase the long-term real rate of interest by about three basis points, though one specification suggests a larger impact, while some estimates are not statistically significantly different from zero. By presenting a range of results with the same data, we illustrate the dependence of estimation on specification and definition differences.

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“…Specifically, an increase in the budget deficit or public debt causes the interest rate to rise. However, some economists argue that the expected budget deficit or government debt, instead of the present, affects the real long-term interest rate (Kameda 2014;Laubach 2009;Engen and Hubbard 2004;Quigley and Porter-Hudak 1994;Thorbecke 1993;Wachtel and Young 1987;Feldstein 1986). Conversely, the Ricardian equivalence argues that deficit does not matter.…”

Section: Theoretical Background and A Brief Literature Reviewmentioning

confidence: 99%

Monetary and fiscal factors in nominal interest rate variations in Sri Lanka under a deregulated regime

Maitra

2017

Financ Innov

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Background: This paper examines the role of monetary and fiscal factors in interest rate variations in Sri Lanka under its deregulated regime of interest rates. In addition the paper also examines the role of monetary factors in the variation of interest rates, using a quarterly dataset for the post-global recession period, when the exchange rate is determined by market forces. Results: Empirical analysis uses a dataset of nominal interest rates, money growth, income growth, changes in nominal exchange rate, and budget deficit. From the methodological point of view the paper involves vector autoregression model and Wald tests of Granger causality, followed by impulse response analysis while stationarity and the order of integration of the selected variables are confirmed involving the augmented Dickey-Fuller and the Phillips-Perron unit-root tests. Results: The paper confirms that both monetary and fiscal factors have significant effects on the variations of interest rates. Money growth triggers an increase in interest rates, which supports the Fisher equation view, while income growth has a negative impact. Budget deficit causes a rise in interest rates, but the role of the exchange rate is found to be almost insignificant, probably due to including exchange rate series that cover both the pegged and market-based regimes of exchange rates. The second part of the analysis, using a quarterly dataset for the post-global recession period, further establishes the positive impact of M2 money growth and income growth on interest rates. In this case, exchange rate depreciation causes an increase in interest rates.

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A New Approach in Analyzing the Effect of Deficit Announcements of Interest Rates

Cited by 19 publications

References 6 publications

Federal Government Debt and Interest Rates

Federal Government Debt and Interest Rates

Federal Government Debt and Interest Rates

Monetary and fiscal factors in nominal interest rate variations in Sri Lanka under a deregulated regime

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