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

Ardagna, Silvia, Caselli, Francesco ORCID: 0009-0001-5191-7156 and Lane, Timothy (2004) Fiscal discipline and the cost of public debt service: some estimates for OECD countries. . Centre for Economic Policy Research (Great Britain), London, UK.

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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. Domestic fiscal policy continues to affect domestic interest rates, however, even after controlling for worldwide debts and deficits.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://www.cepr.org
Additional Information:	© 2004 Silvia Ardagna, Francesco Caselli and Timothy Lane
Divisions:	Centre for Economic Performance Economics
Subjects:	H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit; Surplus E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
Date Deposited:	03 Jun 2008 09:23
Last Modified:	01 Oct 2024 03:17
URI:	http://eprints.lse.ac.uk/id/eprint/5268

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