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

Abstract

Using over a half century of data, this empirical study adopts a simple loanable funds to investigate the impact of the federal budget deficits in the U.S. on the ex post real interest rate yield on ten year U.S. Treasury notes. Three estimates using annual data for three different time periods (1960–2013, 1971–2013, 1980–2013) are provided; in addition, as a de facto modest test of robustness, one additional estimate using quarterly data for the period 1960.1 through 2013.4 is also provided. In each of the four empirical analyses, an autoregressive 2SLS estimate finds that the ex post real interest rate yield on ten year U.S. Treasury notes is an increasing function of the ex post real interest rate yield on Moody’s Baa-rated corporate bonds, the ex post real interest rate yield on three year Treasury notes, and the ex post real interest rate yield on high grade municipal bonds. This exploratory analysis also finds consistent evidence that federal budget deficit (relative to the GDP level) exercised a positive and statistically significant impact on the ex post real interest rate yield on ten year Treasury notes, a finding compatible in principle with a number of earlier studies of shorter time periods.