THE DIFFERING EFFECTS OF PRE-1981 AND POST-1981 FEDERAL-BUDGET DEFICITS ON TAX-ADJUSTED REAL INTEREST-RATES

This paper employs an estimating equation relating tax-adjusted real i nterest rates to deficits and other economic variables to examine the differing effects of pre- and post-1981 federal budget deficits on ex ante and ex post real tax-adjusted short-term interest rates over the period 1961:1-1992:2. The results for the 1961:1-1992:2 period, taking into account a shift in the linkage between the ratio of alternative measures of the deficit to potential GDP occurring in 1981:1, indicate that the ratio of both the NIPA deficit and the cyclically adjusted d eficit to potential GDP have a significant effect on ex ante and ex po st real tax-adjusted interest rates for the post-1981 period, but no s ignificant effect before 1981.