INTEREST-RATES, GOVERNMENT PURCHASES, AND BUDGET DEFICITS - A FORWARD-LOOKING MODEL

This article describes a forward-looking model for long-term interest rates. It shows that movements in expected deficits relative to moveme nts in actual deficits are a statistically significant determinant of changes in long-term interest rates. Other determinants include change s in actual government purchases, movements in the expected unemployme nt rate relative to changes in the actual unemployment rate, the expec ted rate of growth in the money supply, and inflation uncertainty.