Impact of U.S. federal government budget deficits on the ex ante real interest rate yield on ten-year treasury notes during the post-Bretton Woods (1972–2016) era

Abstract

This exploratory empirical study adopts an open-economy loanable funds model to investigate the impact of post-Bretton Woods U.S. federal government budget deficits on the ex ante real interest rate yield on ten-year Treasury notes. Autoregressive, two stage least squares (AR/2SLS) estimation for the 1972–2016 study period reveals that the ex ante real interest rate yield on these notes has been an increasing function of the federal budget deficit (expressed as a percent of GDP). It follows that elevating the federal budget deficit appears to elevate the real cost of borrowing in the U.S. Given the implications of higher longer-term ex ante real interest rates on investment in new plant and equipment and other economic variables, this finding is one that responsible policy-makers should not overlook.