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

Ardagna Silvia (), Francesco Caselli () and Lane Timothy ()
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Ardagna Silvia: Harvard University
Lane Timothy: IMF

The B.E. Journal of Macroeconomics, 2007, vol. 7, issue 1, 1-35

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.

Date: 2007
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Related works:
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2007) Downloads
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2005) Downloads
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2004) Downloads
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2004) Downloads
Working Paper: Fiscal Discipline and the Cost of Public Debt Service; Some Estimates for OECD Countries (1998) Downloads
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