Budget Deficits, Tax Rules, and real Interest Rates

Martin S. Feldstein

112 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Economic and Fiscal Studies Fiscal Policies and Political Economy

Abstract

This paper examines three sources of the fluctuations in real interest rates during the past three decades: changes in budget deficits, changes in tax rules, and changes in monetary policy.The evidence indicates that budget deficits and monetary policy have had a strong influence on the level of long-term interest rates but fails to identify any effect of changes in corporate tax rates and investment incentives.The analysis shows that it is projected future budget deficits rather than the current level of the actual or structural deficit that influence long-term interest rates.Each percentage point increase in the five-year projected ratio of budget deficits to GNP raises the long-term government bond rate by approximately 1.2 percentage points while the ratio of the current deficit to GNP (either actual or structural) has no significa effect.The specific parameter estimates imply that the increase in projected budget deficits was responsible for about two-thirds of the rise in the interest rates between 1977-78 and 1983-84.

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References

1974Are Government Bonds Net Wealth?1969A General Equilibrium Approach To Monetary Theory 1979On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials 1967Money, Interest and Prices 1981Taxation and Corporate Investment: A q-Theory Approach 1955The Economic Report of the President.1982Domestic Saving and International Capital Movements in the Long Run and the Short Run 2016Do Large Deficits Produce High Interest Rates

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n.d.NBER Macroeconomics Annual 1987, Volume 2 2007Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries 2004Budget Deficits, National Saving, and Interest Rates 2010Fiscal Deficits, Public Debt, and Sovereign Bond Yields 2003Economic Effects of Sustained Budget Deficits 1987Ricardian Equivalence: An Evaluation of Theory and Evidence

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