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Corresponding Author:
Richard J. Cebula, Davis College of Business, Jacksonville University, Jacksonville, Florida, USA

Maggie Foley, Jacksonville University, Davis College of Business, Jacksonville, Florida, USA

An Empirical Analysis for the US of the Effects of Government Budget Deficits on the ex ante Real Interest Rate Yields on Thirty-Year and Twenty-Year Treasury Bonds

Volume 72 - Issue 2, May 2019
(pp. 231-252)
JEL classification: E43, E62, H62
Keywords: Budget Deficits, Ex Ante Real Interest Rate Yields, Thirty-Year Treasury Bonds, Twenty-Year Treasury Bonds, Monetary Policy, Crowding Out


This study empirically investigates the impact of federal government budget deficits on the ex ante real interest rate yield on thirty-year and twenty-year U.S. Treasury bonds. After allowing for the exchange rate and a  variety of other control variables, it is found that autoregressive two stage least squares estimations for the post-Bretton Woods era reveal that the ex ante real interest rate yields on both of these bonds have been an increasing function of the federal budget deficit. Accordingly, since long-term U.S. Treasury bond issues compete directly with household bond issues (such as home mortgages) as well as corporate bond issues in the financial marketplace, legislators and other policy-makers should circumspect about the potential implications of actions that increase the magnitude of budget deficits. This is because higher budget deficits are very likely to elevate longer-term ex ante real interest rates affecting household purchases of durable goods, such as housing and business investment in new plant and equipment and technology and hence are likely to adversely influence long-term macro-economic growth through crowding-out effects.

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Institute for International Economics
of the Genoa Chamber of Commerce

Istituto di Economia Internazionale
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