For the period 1963-1994, this study (a) empiracally investigates the impact of
structural federal budget deficits on the commercial bank cost of deposits and prime rate of interest and (b) provides currentlupdated information through 1994 on this
important policy issue of the interest rate impact of budget deficits. The instrumental
variables estimates in this study, which are based in a loanable funds framework,
find the cost of deposits at commercial banks to be an increasing function of the
structural deficit but the prime rate at banks to be unaffected by the deficit. The
former result has potential implications for crowding out.
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