Budget deficits and interest rates: a fresh perspective
We extend the literature on budget deficits and interest rates in three ways: we examine both advanced and emerging economies and for the first time a large emerging market panel; explore interactions to explain some of the heterogeneity in the literature; and apply system Generalized
Method of Moments (GMM). There is overall a highly significant positive effect of budget deficits on interest rates, but the effect depends on interaction terms and is only significant under one of the several conditions: deficits are high, mostly domestically financed, or interact with high
domestic debt; financial openness is low; interest rates are liberalized; or financial depth is low.
Keywords: E43; E62; budget deficits; fiscal policy; interest rates
Document Type: Research Article
Affiliations: 1: Middle East and Central Asia Department,International Monetary Fund, Washington, USA 2: Fiscal Affairs Department, International Monetary Fund, Washington, USA
Publication date: 01 June 2013
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