Government Deficits and Interest Rates: A No-Arbitrage Structural VAR Approach

28 Pages Posted: 2 Jan 2005

See all articles by Qiang Dai

Qiang Dai

University of North Carolina (UNC) at Chapel Hill - Finance Area

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: March 14, 2004

Abstract

What is the effect of government deficits on interest rates? This fundamental question has not been convincingly answered. We propose a no-arbitrage structural VAR method that allows us to incorporate the cross-sectional information in bond yields into a structural macroeconomic framework. We find that the government deficit is an important factor behind the yield curve: A one percentage point increase in the deficit increases the 10 year rate by 41 basis points.

Suggested Citation

Dai, Qiang and Philippon, Thomas, Government Deficits and Interest Rates: A No-Arbitrage Structural VAR Approach (March 14, 2004). Available at SSRN: https://ssrn.com/abstract=642141 or http://dx.doi.org/10.2139/ssrn.642141

Qiang Dai (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-7182 (Phone)

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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