Deteriorating Public Finances and Rising Government Debt: Implications for Monetary Policy

Lillian Cheung, Chi-Sang Tam and Jessica Szeto
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Lillian Cheung: Research Department, Hong Kong Monetary Authority
Chi-Sang Tam: Research Department, Hong Kong Monetary Authority
Jessica Szeto: Research Department, Hong Kong Monetary Authority

No 915, Working Papers from Hong Kong Monetary Authority

Abstract: The sharp rise in government debt in many major economies following the introduction of large fiscal stimulus measures during the global financial crisis of 2008-09 has triggered concerns over its impact on long-term interest rates and the potential negative consequences for future growth and inflation. This paper uses an error-correction model to assess the effect of growing government debt on long-term real interest rates by drawing on empirical evidence from the US. The results show that in the long run, a one-percentage-point increase in the federal debt-to-GDP ratio raises the equilibrium 10-year real US Treasury yield by about six basis points. We also discuss the economic consequences of a rise in the world long-term interest rates, and draw implications for longer-term growth and the conduct of monetary policy in the Asian economies.

Keywords: Public debt; fiscal policy; monetary policy; long term interest rate; real interest rate; error-correction model (search for similar items in EconPapers)
JEL-codes: E43 E47 E52 E62 H63 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2009-08
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac, nep-mon and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:hkg:wpaper:0915

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