A NOTE ON THE IMPACT OF THE UNITED-STATES FEDERAL-BUDGET DEFICIT ON THE INTERMEDIATE-TERM INTEREST-RATE, 1960-94

There is an extensive literature investigating the impact of federal b udget deficits in the US on interest rate yields. This literature focu ses almost entirely on short-term rates (under one year to maturity) a nd long-term rates (ten years or more to maturity). However, almost no attention has been directed at intermediate-term interest rate yields , that is yields on bonds maturing more than one year and less than te n years in the future. Also, this literature essentially ignores the s econd half of the 1980s and the 1990s. Accordingly, this note empirica lly investigates the impact of budget deficits in the US on the intere st rate yield on three-year US Treasury notes for the period 1960 thro ugh the end of 1994. Based on OLS and IV estimates, two of which inclu de net international capital inflows, it is found that budget deficits do raise intermediate-term, rates, which may strengthen arguments tha t budget deficits lead to crowding out.