Impact of budget deficits on ex post real long-term interest rates

Abstract

The study investigates the impact of budget deficits on ex post real long-term interest rates over the 1973–1995 period, thereby addressing an interest rate measure and time period, i.e. beyond the mid-to late-1980s, that have received only limited attention in the literature. The instrumented variables (IV) estimate provides strong evidence that budget deficits do raise the long-term real ex post rate of interest.