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Public Debt in Advanced Economies and its Spillover Effectson Long-Term Yields

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Author Info

  • C. Emre Alper
  • Lorenzo Forni

Abstract

Several models establish a positive association between public debt ratios and long-term real yields, but the empirical evidence is not always conclusive. We reconsider this issue, focusing in particular on possible spillover effects of large advanced economies'' debt levels to other economies'' borrowing yields, especially in emerging markets. We extend the existing literature by using real time expectations of fiscal and other macroeconomic variables for a large sample of advanced and emerging economies. We show that an increase in the public debt levels of large advanced economies - especially the United States - spills over to both emerging markets and other advanced economies'' long-term real yields and that this effect is significant at the current levels of advanced economies'' debt ratios.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/210.

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Length: 23
Date of creation: 01 Aug 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/210

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Related research

Keywords: Spillovers; Public debt; Bonds; Developed countries; Economic models; Emerging markets; Interest rates; domestic debt; debt ratio; public debt; inflation; debt ratios; government debt; real money; real interest rates; debt threshold; current account; real interest rate; sovereign bond; monetary policy; foreign exchange; debt sustainability; monetary economics; public borrowing; central bank; domestic financial markets; evolution of debt; public finance; terms of trade; debt intolerance; debt service; domestic savings; budget balance; domestic public debt; current account balance; current account surplus; real rates; domestic investors; domestic financing; current account surpluses;

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References

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  1. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," NBER Working Papers 9908, National Bureau of Economic Research, Inc.
    • Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  2. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez & Martin Uribe, 2011. "Risk Matters: The Real Effects of Volatility Shocks," American Economic Review, American Economic Association, vol. 101(6), pages 2530-61, October.
  3. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
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  5. Thomas Laubach, 2003. "New evidence on the interest rate effects of budget deficits and debt," Finance and Economics Discussion Series 2003-12, Board of Governors of the Federal Reserve System (U.S.).
  6. Douglas Laxton & Michael Kumhof, 2007. "A Party without a Hangover?on the Effects of U.S. Government Deficits," IMF Working Papers 07/202, International Monetary Fund.
  7. Ferrero, Andrea, 2010. "A structural decomposition of the U.S. trade balance: Productivity, demographics and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 478-490, May.
  8. Atish R. Ghosh & Jonathan David Ostry & Charalambos G. Tsangarides, 2011. "Exchange Rate Regimes and the Stability of the International Monetary System," IMF Occasional Papers 270, International Monetary Fund.
  9. Edwards, Sebastian, 1984. "LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976-80," American Economic Review, American Economic Association, vol. 74(4), pages 726-34, September.
  10. Sanjeev Gupta & Amine Mati & Emanuele Baldacci, 2008. "Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets," IMF Working Papers 08/259, International Monetary Fund.
  11. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
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Citations

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Cited by:
  1. Salvatore Dell'Erba & Sergio Sola, 2013. "Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel," IMF Working Papers 13/159, International Monetary Fund.
  2. Salvatore Dell’Erba & Ricardo Hausmann & Ugo Panizza, 2013. "Debt levels, debt composition, and sovereign spreads in emerging and advanced economies," Oxford Review of Economic Policy, Oxford University Press, vol. 29(3), pages 518-547, AUTUMN.
  3. Serkan Arslanalp & Raphael W. Lam, 2013. "Outlook for Interest Rates and Japanese Banks’ Risk Exposures under Abenomics," IMF Working Papers 13/213, International Monetary Fund.
  4. Nazim Belhocine & Salvatore Dell'Erba, 2013. "The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads," IMF Working Papers 13/93, International Monetary Fund.
  5. Salvatore Dell'Erba & Emanuele Baldacci & Tigran Poghosyan, 2011. "Spatial Spillovers in Emerging Market Spreads," IMF Working Papers 11/221, International Monetary Fund.
  6. Raphael W. Lam & Kiichi Tokuoka, 2011. "Assessing the Risks to the Japanese Government Bond (JGB) Market," IMF Working Papers 11/292, International Monetary Fund.

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