Keywords: Interest rates, budget deficit, government spending
Abstract: This paper uses news reports about two deficit-reduction
laws of the past decade to identify days when expected fiscal policy
clearly became more or less expansionary. The paper also proposes a
technique for identifying whether the real interest rate increased
or decreased on those days, based on changes in the nominal interest
rate, the exchange rate, commodity prices, and stock prices. As
economic theory predicts, higher expected government spending and
budget deficits raised real interest rates and the value of the
dollar, while lower expected spending and deficits reduced real rates
and the value of the dollar.
Full paper (203 KB PDF)
| Full paper (320 KB Postscript)
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