Does More Government Deficit Lead To A Higher Long-Term
Author:Yu Hsing
JEL:P43, E43, E62
DOI:
Keywords:government deficits, long-term interest rates, loanable funds model, expected
inflation, world interest rates, exchange rates
Abstract:
more government borrowing or debt as a percent of GDP leads to a higher government
bond yield, that a higher real money market rate, a higher expected inflation rate, a higher
EU government bond yield, or depreciation of the Estonian kroon (EEK) would increase
the Estonian government bond yield, and that the negative coefficient of the percent change
in real GDP has an unexpected sign. When the conventional closed-economy or openeconomy
loanable funds model is considered, the article finds that more government
borrowing as a percent of GDP does not result in a higher government bond yield, that the
positive coefficients of the real money market rate, the growth rate of real GDP, and the
expected inflation are significant at the 1%, 5% or 10% level, and that the negative
coefficient of the ratio of the net capital inflow to GDP in the conventional open-economy
loanable funds model is significant at the 1% level.