Fiscal policy and the term structure

This paper investigates the empirical association between deficits in interest rates. It extends the results in Plosser (1982) to include the more recent experience. The association between a measure of ex ante real rates and deficits is also considered. The results largely corroborate the previous results. First, little or no association between real or nominal interest rates and deficits is found. Second, output and, to a lesser extent, military spending are found to have a significant association with interest rates.