Fiscal discipline and the cost of public dept service: some estiames for OECD countries
AbstractWe 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. JEL Classification: E62, E44, H62
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 0411.
Date of creation: Nov 2004
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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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-MAC-2005-10-04 (Macroeconomics)
- NEP-PBE-2005-10-04 (Public Economics)
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