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

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  • Silvia Ardagna
  • Francesco Caselli
  • Timothy Lane

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

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0670.

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Date of creation: Jan 2005
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Handle: RePEc:cep:cepdps:dp0670

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Government deficit; public debt; long-term interest rates;

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  1. A trillion dollar war (crossposted at CT)
    by John Quiggin in John Quiggin on 2005-09-23 12:00:00
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