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Debt Servicing Costs and the Growth of Public Expenditure

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  • Gemmell, Norman

Abstract

This paper models the long-run effects on debt interest expenditures of persistent bond-financed deficits. It is shown that the rate of growth of total debt, and interest payments, is a function of the growth rate of annual deficits, bond maturity structures, and the nominal rate of interest. Interest rates only affect the rate of growth of debt, however, when debt service payments are not wholly financed by tax revenues. The long-run time path of debt service costs is simulated for alternative parameter values showing the effects of different inflation, income growth, and interest rates on debt interest expenditures.

Suggested Citation

  • Gemmell, Norman, 1988. "Debt Servicing Costs and the Growth of Public Expenditure," Public Finance = Finances publiques, , vol. 43(2), pages 223-235.
    • Handle: RePEc:pfi:pubfin:v:43:y:1988:i:2:p:223-35
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