Working Paper: NBER ID: w1970
Authors: Martin Feldstein
Abstract: This paper examines three sources of the fluctuations in real interest rates during the past three decades: changes in budget deficits, changes in tax rules, and changes in monetary policy. The evidence indicates that budget deficits and monetary policy have had a strong influence on the level of long-term interest rates but fails to identify \nany effect of changes in corporate tax rates and investment incentives. \nThe analysis shows that it is projected future budget deficits rather than the current level of the actual or structural deficit that influence long-term interest rates. Each percentage point increase in the five-year projected ratio of budget deficits to GNP raises \nthe long-term government bond rate by approximately 1.2 percentage points while the ratio of the current deficit to GNP (either actual or structural) has no significa effect. The \nspecific parameter estimates imply that the increase in projected budget deficits was responsible for about two-thirds of the rise in the interest rates between 1977-78 and 1983-84.
Keywords: budget deficits; real interest rates; tax rules; monetary policy
JEL Codes: E43; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Projected future budget deficits (H68) | Long-term interest rates (E43) |
| Budget deficits (H62) | Long-term interest rates (E43) |
| Tax rules (K34) | Long-term interest rates (E43) |
| Inflation expectations (E31) | Long-term interest rates (E43) |
| Current levels of actual or structural deficits (H62) | Long-term interest rates (E43) |