Empirical note on the impact of US Federal Government budget deficits on bank interest rates

Abstract

This study examines, for the period 1963–1995, the impact of federal budget deficits in the US on interest rates at commercial banks. Interest rates at banks have been largely neglected in the deficit/interest rate literature for the US. Moreover, the deficit/interest rate literature for the US has effectively ignored the second half of the 1980s and the 1990s. Accordingly, this study empirically investigates the impact of federal budget deficits on the cost of deposits to banks and prime rate of interest charged by banks, while providing current/updated information on this important policy issue of the interest-rate impact of budget deficits. The estimates find the cost of deposits at banks to be an increasing function of the budget deficit but the prime rate to be unaffected by the budget deficit.