Budget Deficits and the Term Structure of Interest Rates in Italy

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This paper tests the hypothesis that changes in the federal budget deficit impact the term structure of interest rates in Italy. The results suggest that budget deficits increase the yield spread between long term government bonds and the three month Treasury bill. The implication is that budget deficits may hinder long-term economic growth in Italy, via a crowding out effect, by increasing long-term interest rates relative to short-term interest rates.