Recent empirical evidence on the impact of the primary budget deficit on nominal longer term treasury note interest rate yields

Abstract

This study empirically investigates the impact of the federal budget deficit on the nominal interest rate yields on seven and ten year treasury notes over the 1992?2003 period. To measure the budget deficit, the primary budget deficit, which excludes net interest payments by the treasury, is adopted. In a loanable funds model that includes the monetary base, expected inflation, an ex ante real short term interest rate yield and an ex ante real intermediate term interest rate yield, the percentage growth rate of real GDP, and the percentage growth rate of the S&P 500 stock index, instrumental variables estimations using quarterly data reveal that the primary deficit has raised the nominal interest rate yields on both seven year and ten year treasury notes over the study period, raising serious concerns about the currently surging national debt.

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