An Empirical Note on Deficits, Interest Rates, and International Capital Flows

The purpose of this study is to examine the impact of federal budget deficits upon the nominal long term rate of interest in the United States when, in addition to the usual potential interest-rate-influencing factors such as monetary policy, short term interest rates, the budget deficit, and inflationary expectations, net international capital flows into the United States have been accounted for. Using three alternative measures of long term interest rate yields, the 2SLS estimations provided in this note provide strong empirical evidence that federal budget deficits in the United States exercise a positive and statistically significant influence over longer-term rates of interest despite the influence of net capital inflows