FEDERAL-BUDGET DEFICITS, INTEREST-RATES, AND INTERNATIONAL CAPITAL FLOWS - A FURTHER NOTE

This note empirically examines the impact of federal budget deficits o n the nominal long term rate of interest in the United States. The ana lysis adopts a loanable funds model that includes net international ca pital inflows. The analysis allows for endogeneity of the capital flow s variable and also allows for the Federal Reserve policy shift of Oct ober, 1979-October, 1982. The instrumental variables estimate finds th at federal deficits do raise the long term nominal rate of interest, d espite the effects of capital flows, which dampen the interest rate im pact of the federal deficit.