An exploratory empirical inquiry into the impact of federal budget deficits on the ex post real interest rate yield on ten year Treasury notes over the last half century

Abstract

Using over a half century of data, this exploratory empirical study adopts a simple loanable funds to investigate the impact of the federal budget deficits on the ex post real interest rate yield on 10 year Treasury notes. For the period 1960–2012, an autoregressive 2SLS estimate finds that the ex post real interest rate yield on 10 year U.S. Treasury notes is an increasing function of the ex post real interest rate yield on Moody’s Baa-rated corporate bonds, the ex post real interest rate yield on 3 year Treasury notes, and the ex post real interest rate yield on high grade municipal bonds. This exploratory analysis also finds that federal budget deficit (relative to the GDP level) exercised a positive and statistically significant impact on the ex post real interest rate yield on 10 year Treasury notes, a finding consistent with a number of earlier studies of shorter time periods