Budget Deficits and Interest Rates: A Fresh Perspective

February 1, 2008

Preview Citation

Format: Chicago

Ari Aisen, and David Hauner. Budget Deficits and Interest Rates: A Fresh Perspective, (USA: International Monetary Fund, 2008) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Budget planning and preparation, Domestic debt, Emerging and frontier financial markets, Government debt management, Inflation

Keywords: Budget deficit, Deficit, Nominal interest rate, WP

Publication Details

Pages:

19
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/042
Stock No:

WPIEA2008042
ISBN:

9781451869040
ISSN:

1018-5941

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