Fiscal discipline and the cost of public debt service: some estimates for OECD countries

Silvia Ardagna, Francesco Caselli and Timothy Lane

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: Government deficit; public debt; long-term interest rates (search for similar items in EconPapers)
JEL-codes: E44 E62 H62 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2005-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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