Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries

Silvia Ardagna, Francesco Caselli () and Timothy Lane

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: We use a panel of 16 OECD countries over several decades to investigate the effects ofgovernment debts and deficits on long-term interest rates. In simple static specifications, aone-percentage-point increase in the primary deficit relative to GDP increasescontemporaneous long-term interest rates by about 10 basis points. In a vector autoregression(VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10years. The effect of debt on interest rates is non-linear: only for countries with above-averagelevels of debt does an increase in debt affect the interest rate. World fiscal policy is alsoimportant: an increase in total OECD-government borrowing increases each country'sinterest rates. However, domestic fiscal policy continues to affect domestic interest rates evenafter controlling for worldwide debts and deficits.

Keywords: Government deficit; public debt; long-term interest rates (search for similar items in EconPapers)
JEL-codes: E62 E44 H62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pbe
Date: Written
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Related works:
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2004)
Working Paper: Fiscal discipline and the cost of public debt service: some estimates for OECD countries (2004)
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2004)
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (1998)
Journal Article: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2007)
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