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

  • Silvia Ardagna , Francesco Caselli and Timothy Lane
Published/Copyright: August 15, 2007
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 7 Issue 1

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
Published Online: 2007-8-15

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

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https://doi.org/10.2202/1935-1690.1417
Keywords for this article
government deficit; public debt; long-term interest rates

Articles in the same Issue

  1. Topics Article
  2. To Pool or to Aggregate? Tests with a Dynamic Panel Macroeconometric Model of Australian State Labor Markets
  3. Economic Growth: A Channel Decomposition Exercise
  4. Liquidity Effects, Variable Time Preference, and Optimal Monetary Policy
  5. Optimal Monetary Policy, Endogenous Sticky Prices, and Multiple Equilibria
  6. A Simple Wicksellian Macroeconomic Model
  7. Confidence-Enhanced Economic Growth
  8. A Positive Analysis of Targeted Employment Protection Legislation
  9. The Political Economy of Numbers: On the Application of Benford's Law to International Macroeconomic Statistics
  10. Exchange Rate Regimes, Inflation and Growth in Developing Countries -- An Assessment
  11. Does Permanent Income Determine the Vote?
  12. Rich, Poor and Growth-Miracle Nations: Multiple Equilibria Revisited
  13. Savers, Spenders and Fiscal Policy in a Small Open Economy
  14. Assessing Sign Restrictions
  15. Euro Area Inflation Differentials
  16. Decomposing Consumer Wealth Effects: Evidence on the Role of Real Estate Assets Following the Wealth Cycle of 1990-2002
  17. Gold, Fiat Money, and Price Stability
  18. Housing Tenure and Wealth Distribution in Life Cycle Economies
  19. Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries
  20. Political Sustainability of Unfunded Pensions in an Endogenous Growth Model
  21. Institutional Determinants of International Equity Portfolios - A Country-Level Analysis
  22. Contributions Article
  23. The Arrow Effect under Competitive R&D
  24. Openness, Wage Floors and Technology Change
  25. Explaining the Evidence on Inequality and Growth: Informality and Redistribution
  26. Nominal Debt Dynamics, Credit Constraints and Monetary Policy
  27. TFP Differences and the Aggregate Effects of Labor Mobility in the Long Run
  28. A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best?
  29. Specialization Patterns and the Factor Bias of Technology
  30. Inspecting the Mechanism Exactly: A Closed-form Solution to a Stochastic Growth Model
  31. ICT and Productivity Resurgence: A Growth Model for the Information Age
  32. A Macroeconomic Model of Entry with Exporters and Multinationals
  33. The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses about the Transmission of Energy Price Shocks
  34. Advances Article
  35. Stable Sunspot Equilibria in a Cash-in-Advance Economy
  36. Should Monetary Policy Use Long-Term Rates?
  37. Habit Formation and Aggregate Consumption Dynamics
  38. Factor Utilization and the Real Impact of Financial Crises
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