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

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Author Info
Silvia Ardagna
Francesco Caselli
Timothy Lane

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Abstract

We use a panel of 16 OECD countries over several decades to investigate the effects ofgovernment debts and deficits on long-term interest rates. In simple static specifications, aone-percentage-point increase in the primary deficit relative to GDP increasescontemporaneous 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 10years. The effect of debt on interest rates is non-linear: only for countries with above-averagelevels of debt does an increase in debt affect the interest rate. World fiscal policy is alsoimportant: an increase in total OECD-government borrowing increases each country'sinterest rates. However, domestic fiscal policy continues to affect domestic interest rates evenafter 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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Related research
Keywords: Government deficit; public debt; long-term interest rates;

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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