Government Debt and Long-Term Interest Rates

Noriaki Kinoshita

No 2006/063, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the relationship between government debt and long-term interest rates. A dynamic general equilibrium model that incorporates debt nonneutrality is specified and solved, and numerical simulations using the model are undertaken. In addition, empirical evidence using panel data for 19 industrial countries is examined. The estimation provides some evidence supporting the theoretical predictions: the paper finds that the simulated and estimated interest rate effects of government debt tend to be small. However, an increase in government consumption and debt leads to a considerably larger effect. The paper also argues that, although the interest rate effects of pure crowding out may be limited, the economic impact of accumulating government debt cannot be ignored.

Keywords: WP; debt; physical capital; crowding out; yield; Government debt; long-term interest rates; dynamic general equilibrium model; crowding-out effect; debt neutrality; debt measure; steady-state interest rate effects; results from an increase; production function; interest rate effects of an increase; debt level; government debt result; simulated interest rate effect of government debt; increase in government debt; simulated interest rate effect; Real interest rates; Long term interest rates; Government consumption; Government debt management (search for similar items in EconPapers)
Pages: 25
Date: 2006-03-01
References: View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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