Budget Deficits and Interest Rates: A Fresh Perspective

Aisen, Ari; Hauner, David

Download This Paper

Open PDF in Browser

Add Paper to My Library

Budget Deficits and Interest Rates: A Fresh Perspective

IMF Working Paper No. 08/42

21 Pages Posted: 29 Feb 2008

See all articles by Ari Aisen

Ari Aisen

International Monetary Fund (IMF) - Asia and Pacific Department; Central Bank of Chile

David Hauner

International Monetary Fund (IMF) - African Department

There are 2 versions of this paper

Date Written: February 2008

Abstract

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 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 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: Budget deficits, Interest rates, Fiscal policy

Suggested Citation: Suggested Citation

Aisen, Ari and Hauner, David, Budget Deficits and Interest Rates: A Fresh Perspective (February 2008). IMF Working Paper No. 08/42, Available at SSRN: https://ssrn.com/abstract=1096866