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

Qiang Dai, Thomas Philippon
2004 Social Science Research Network  
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.
doi:10.2139/ssrn.642141 fatcat:3hxxgohoyvc47evi7wis4n2nhi