Preliminary communication
Does more government defi cit raise the interest rate? Application of extended loanable funds model to Slovenia
Yu Hsing
; College of Business, Southeastern Louisiana University, Hammond, USA
Abstract
Extending the open-economy loanable funds model, this paper finds that more government deficit as a percentage of GDP does not lead to a higher government bond yield. In addition, a higher real Treasury bill rate, a higher expected inflation rate, a higher EU government bond yield, or an expected depreciation of the euro against the U.S. dollar would increase Slovenia’s long-term interest rate. The negative coefficient of the percentage change in real GDP is insignificant at the10% level. Applying the standard closed-economy or open-economy loanable funds model without including the world interest rate and the expected exchange rate, we find similar conclusions except that the positive coefficient of the ratio of the net capital inflow to GDP has a wrong sign and is insignificant at the 10% level.
Keywords
Government deficits; long-term interest rates; loanable funds model; expected inflation; world interest rates; expected exchange rates
Hrčak ID:
45446
URI
Publication date:
24.12.2009.
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