A Note on Federal Budget Deficits and the Term Structure of Real Interest Rates in the United States

Using quarterly data and dealing with the ex post real rates on three month U.S. Treasury bills and 20 year U.S. Treasury bonds, this empirical note has estimated an IS-LM based regression by 2SLS. The results indicate that the budget deficit raises the slope of the yield curve. Furthermore, to the extent that private sector capital formation is sensitive to longer term real interest rates in the United States, federal budget deficits lead to crowding out of private investment and hence to slower economic growth over the longer run.