Not all government budget deficits are created equal: Evidence from advanced economies' sovereign bond markets

Jemima Peppel-Srebrny

Journal of International Money and Finance, 2021, vol. 118, issue C

Abstract: We find that bond markets charge significantly higher interest rates for deficits due to higher government current spending than for deficits due to higher government investment. Thus, from a sovereign risk perspective, not all government budget deficits are created equal. To show this, we use a panel regression approach on European Commission data for 31 advanced economies from 1990 onwards. Econometrically, we address potential endogeneity by using forecasts of fiscal variables and by instrumental variable methods. Based on our preferred specifications, a higher deficit solely due to higher government investment would in fact decrease long-term government bond yields. These findings suggest that the policy debate about fiscal sustainability and fiscal rules should, at the very least, distinguish budget deficits that are the result of investment from those that are not.

Keywords: Government budget deficits; Government investment; Fiscal policy; Long-term interest rates; Sovereign risk; Advanced economies (search for similar items in EconPapers)
JEL-codes: E44 E62 H54 H62 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S026156062100111X
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Government borrowing cost and budget deficits: is investment spending different? (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:118:y:2021:i:c:s026156062100111x

DOI: 10.1016/j.jimonfin.2021.102460

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().