Recent Evidence on the Impact of Federal Government Budget Deficits on the Nominal Long Term Mortgage Interest Rate in the U.S.

Abstract

This study provides recent empirical evidence on the impact of the federal budget deficit on the nominal long term mortgage interest rate yield in the U.S. The study is couched within a loanable funds model that includes the cost to financial institutions of borrowing funds, expected inflation, and the percentage growth rate of real GDP, as well as the federal budget deficit expressed as a percent of GDP. Using annual data for the period 1970-2008, two-stage least squares autoregressive estimation reveals that the federal budget deficit, expressed as a percent of GDP, exercised a positive and statistically significant impact on the long term mortgage interest rate yield.