Fiscal discipline and the cost of public dept service: some estiames for OECD countries

Silvia Ardagna, Francesco Caselli and Timothy Lane

No 411, Working Paper Series from European Central Bank

Abstract: We use a panel of 16 OECD countries over several decades to investigate the effects of government debts and deficits on long-term interest rates. In simple static specifications, a one-percentage-point increase in the primary deficit relative to GDP increases contemporaneous 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 10 years. The effect of debt on interest rates is non-linear: only for countries with above-average levels of debt does an increase in debt affect the interest rate. World fiscal policy is also important: an increase in total OECD-government borrowing increases each country's interest rates. However, domestic fiscal policy continues to affect domestic interest rates even after controlling for worldwide debts and deficits. JEL Classification: E62, E44, H62

Keywords: Governement deficit; long-term interest rates; public debt (search for similar items in EconPapers)
Date: 2004-11
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Citations: View citations in EconPapers (41)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2004411

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