Undergraduate Honors Theses

Thesis Defended

Spring 2011

Document Type

Thesis

Department

Economics

First Advisor

Dr. Murat Iyigun

Abstract

This study examines the Ricardian Equivalence Hypothesis by testing the correlation between net government savings and its effect on yields of Treasury bills, bonds, and notes. The United States federal government has borrowed extensively in recent years to finance stimulus projects and to make up for the lost government revenue due to the 2008-2009 recession. In addition, the government will have to increase debt held by the public to finance the $4.5 trillion in intragovernmental holdings which are needed to finance Medicare and Social Security. Running a time-series ordinary least squared regression, I examined Treasury yields with maturity dates from one month to thirty years. I used quarterly data of Treasury yields from the Federal Reserve Bank of Saint Louis and macroeconomic data from the U.S. Bureau of Economic Analysis was examined going back to the year 1962. The Ricardian Equivalence Hypothesis was validated to an extent, with net government savings having a combined contemporary and one year lag effect of -0.618 on net private savings. Upon running multiple regressions, I could not establish a significant relationship between net government savings (either in a contemporary or previous period) and Treasury interest rates for any Treasury security, indicating that the crowding out effect does not necessarily have as strong of an effect on the private bond market.

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