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BPEA Article

Interest Rates and Their Prospect in the Recovery


MUCH CONCERN has been expressed in the financial press and by other observers about the prospects for interest rates in 1975. The particular fear is that the sharp declines in short-term interest rates in 1974 will be followed by sharp increases in both short- and long-term rates in 1975 under the pressure of the massive federal deficits expected in 1975 and 1976. This paper addresses two questions: First, has the movement in short and long-term interest rates since mid-1974 been unusual in light of the slow growth of money and the collapse in economic activity? Second, will the large volume of deficit financing, induced in part by the tax cuts, lend a strong upward push on interest rates in 1975? These can be two aspects of the same question, because an unexpected and fundamental shift in the relationships among interest rates, income, and money may cloud the implications of the deficit for interest rates.


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