Interest Rates, Government Purchases, and Budget Deficits: a Forward-Looking Model

Abstract

This article describes aforward-looking modelfor long-term interest rates. It shows that movements in expected deficits relative to movements in actual deficits are a statistically significant determtnant of changes in long-term interest rates. Other determinants include changes in actual government purchases, movements in the expected unemployment rate relative to changes in the actual unemployment rate, the expected rate of growth in the money supply, and inflation uncertainty.