Recent Evidence on the Impact of Federal Government Budget Deficits on the Nominal Long Term Mortgage Interest Rate in the U.S

Abstract

This study provides recent empirical evidence on the impact of the federal budget deficit on the nominal long term mortgage interest rate yield in the U.S. The study is couched within a loanable funds model that includes the cost to financial institutions of borrowing funds, expected inflation, and the percentage growth rate of real GDP, as well as the federal budget deficit expressed as a percent of GDP. Using annual data for the period 1970-2008, two-stage least squares autoregressive estimation reveals that the federal budget deficit, expressed as a percent of GDP, exercised a positive and statistically significant impact on the long term mortgage interest rate yield.

Impact of Federal Government Budget Deficits on the Longer Term Real Interest Rate in the U.S.: Evidence Using Annual and Quarterly Data, 1960–2013

“…Furthermore, also unlike the present study, the Cebula (2013) study contains (except for the change in per capita GDP variable) different explanatory variables, namely, expected inflation, the ex ante real three month T-bill rate, and the monetary base over GDP in lieu of the variables in equation (4) of the present study; furthermore, Cebula (2013) does not include an estimate involving quarterly data. Another very recent related study by Cebula and Foley (2013) addresses the impact of deficits on the nominal long term fixed-rate mortgage interest rate and its specification (including an expected inflation variable, a measure of the nominal cost of funds, and the real GDP growth rate), differs TDEFY = the total federal budget deficit, expressed as a percent of GDP;…”