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Government debt, deficits and interest rates 1870 - 201

Author

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  • Ron Smith

    (Birkbeck, University of London)

Abstract

This paper examines the effect of changes in the public debt-GDP ratio on long, 10 year, interest rates in a panel of 17 countries over the period 1870-2016 controlling for other variables, in particular the world interest rate. Over this long period one can argue that most of the big changes in public debt were the product of factors largely exogenous to national interest rate determination, such as war, depression or financial crisis. The issue is of current relevance since the covid-19 pandemic has caused large increases in the ratio of public debt to GDP in many countries. The estimates suggest that it is the change in debt, rather than the level of debt or the deficit, that matters for long interest rates. World interest rates have long and short run effects on interest rates which are very well determined and close to one. Current inflation has a small but significant effect.

Suggested Citation

  • Ron Smith, 2020. "Government debt, deficits and interest rates 1870 - 201," BCAM Working Papers 2002, Birkbeck Centre for Applied Macroeconomics.
    • Handle: RePEc:bbk:bbkcam:2002
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    File URL: https://eprints.bbk.ac.uk/id/eprint/41031/1/41031.pdf
    File Function: First version, 2019 (change accordingly)
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    Citations

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    Cited by:

    1. Gylfi Zoega, 2020. "Monetary Hegemony and its Implications for Small, Open Economies," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 48(4), pages 431-446, December.

    More about this item

    Keywords

    Public debt; Government deÖcits; interest rates; world interest rates; macro-history.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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