Prague Economic Papers 2006, 15(1):3-13 | DOI: 10.18267/j.pep.272

Budget Deficit and Interest Rates

Zdeněk Dvorný

The article examines the impact of the budget deficit upon the term structure of Czech interest rates. An important feature of the model is that it enables us to directly test the predictions of the three alternative paradigms, the Keynesian, neoclassical and the Ricardian, concerning the long-term and short-term impact of deficit on interest rates. The result of the study, obtained by the IV method suggests that the budget deficit is negatively related to the interest rate level in the short-run. Therefore, the long-run Ricardian proposition cannot be rejected in favour of any alternative hypothesis.

Keywords: interest rates, budget deficit, IV estimation, GDP decomposition
JEL classification: E43, G28, H61, H62, H63

Published: January 1, 2006  Show citation

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Dvorný, Z. (2006). Budget Deficit and Interest Rates. Prague Economic Papers, 15(1), 3-13. doi: 10.18267/j.pep.272
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