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Public debt and long-term interest rates - the case of Germany, Italy and the USA

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Author Info
Paolo Paesani () (University of Rome – Tor Vergata – Department of Economics and Institutions, Via Columbia n. 2, 00133 Rome, Italy.)
Rolf Strauch () (European Central Bank, Monetary Policy Strategy Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Manfred Kremer () (European Central Bank, Capital Markets and Financial Structure Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Abstract

The debate on the sustainability of public finances is closely related to the analysis of the financial and macroeconomic consequences of government debt accumulation. Focusing on the USA, Germany and Italy over the 1983?2003 period, the central issue addressed in this paper is how the accumulation of government debt affects long-term interest rates, both nationally and across borders. The analysis is based on a small, multivariate econometric model, which allows us to disentangle the more permanent and transitory components of interest rate developments. Empirical evidence shows that in all cases a more sustained debt accumulation leads at least temporarily to higher long-term interest rates. This transitory impact also spills-over into other countries, mainly from the US to the two European countries. JEL Classification: E6, H63.

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Paper provided by European Central Bank in its series Working Paper Series with number 656.

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Length: 46 pages
Date of creation: Jul 2006
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Handle: RePEc:ecb:ecbwps:20060656

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Keywords: Public debt Long-Term Interest Rates Cointegration Common Trends.

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Laurence Ball & N. Gregory Mankiw, 1995. "What do budget deficits do?," Proceedings, Federal Reserve Bank of Kansas City, pages 95-119. [Downloadable!]
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  2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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  5. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Feldstein, Martin S & Eckstein, Otto, 1970. "The Fundamental Determinants of the Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 363-75, November. [Downloadable!] (restricted)
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  9. Yash P. Mehra, 1994. "An error-correction model of the long-term bond rate," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 49-68. [Downloadable!]
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  1. Silvia Ardagna & Francesco Caselli & Timothy Lane, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," Topics in Macroeconomics, Berkeley Electronic Press, vol. 7(1), pages 1417-1417. [Downloadable!] (restricted)
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