Atlantic Economic Journal

, Volume 31, Issue 3, pp 255–265 | Cite as

Budget deficits and real interest rates: Updated empirical evidence on causality

  • Richard Cebula


Using error-correction model (ECM) estimation, the paper empirically examines the causality relationship between the federal government budget deficit and the ex ante real interest rate yield on high grade long term tax free municipal bonds in the U.S. To clarify this deficit or interest rate relationship, the budget deficit is measured by the primary budget deficit, which excludes net interest payments by the Treasury. In a model that includes federal personal income tax rates and net international capital flows, as well as money supply growth, the ECM estimates strongly suggest a bi-directional relationship between the primary budget deficit and the ex ante real interest rate yield. Budget deficits apparently do matter! William Simon's concerns were justified.


Real Interest Rate Budget Deficit International Capital Flow Municipal Bond Government Budget Deficit 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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Copyright information

© International Atlantic Economic Society 2003

Authors and Affiliations

  • Richard Cebula
    • 1
  1. 1.Armstrong Atlantic State UniversityU.S.A.

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