A contemporary investigation of causality between the primary government budget deficit and the ex ante real long term interest rate in the US

Using error-correction model (ECM) estimation, this study empirically examines, for theUS, the causality relationship between the federal government budget deficitand the ex ante real long term interest rate. The system includes personal federal income tax rates, the M2 money supply, the unemployment rate, an ex ante realshort term interest rate and net international capital inflows. To clarify the deficit/interest rate relationship, the budget deficit is measured by the primary deficit, which excludes net interest payments by the Treasury. The ECM estimates in this study provide results that suggest a bi-directional relationship between the primary budget deficit and the ex ante real long term interest rate yield. JEL Codes: E43, H62, E62