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Fiscal shocks, public debt, and long-term interest rate dynamics

Luigi Marattin (), Paolo Paesani () and Simone Salotti

No 14/2011, Working Papers from Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE)

Abstract: Public Finances worldwide have been severely hit by the 2008-2009 Great Recession, stimulating the debate on the consequences of growing fiscal imbalances. Building on Paesani et al. (2006), this paper focuses on the USA, Germany and Italy over the 1983-2009 period and studies the effects of fiscal shocks and government debt accumulation on long-term interest rates, both nationally and across borders. Based on a atheoretical framework, the empirical analysis disentangles permanent and transitory components of interest rates dynamics finding that sustained debt accumulation leads, at least temporarily, to higher long-term interest rates. The is particularly true for the Italian case. There is also evidence of significant cross-country linkages, mainly between Italy and the USA.

Keywords: Public debt; long-term interest rates; cointegration; common trends. (search for similar items in EconPapers)
JEL-codes: E60 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2011-04-13
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