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That Squeezing Feeling: The Interest Burden and Public Debt Stabilization

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  • Xavier Debrun
  • Tidiane Kinda

Abstract

The paper explores the extent to which the pressure of debt service on other spending items may push governments to embark on fiscal consolidation beyond what is strictly necessary to secure solvency. The empirical analysis identifies thresholds of interest bill indicators beyond which governments appear to shift to policies aimed at durably curbing the debt trajectory. Hence, in the current context of high inherited public debts, countries experiencing rising borrowing costs and interest payments would be more likely to enact more aggressive fiscal consolidations than warranted by strict solvency concerns. Conversely, those benefiting from persistently low interest rates despite rising debt stocks would likely opt for a more gradual fiscal consolidation path than what solvency considerations would normally dictate.
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  • Xavier Debrun & Tidiane Kinda, 2016. "That Squeezing Feeling: The Interest Burden and Public Debt Stabilization," International Finance, Wiley Blackwell, vol. 19(2), pages 147-178, June.
  • Handle: RePEc:bla:intfin:v:19:y:2016:i:2:p:147-178
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    File URL: http://hdl.handle.net/10.1111/infi.12090
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    Cited by:

    1. Andric, Vladimir & Arsic, Milojko & Nojkovic, Aleksandra, 2016. "Fiscal Pressure of Interest Payments in Serbia - a Time Series Exploration," EconStor Preprints 141322, ZBW - German National Library of Economics.
    2. de Groot, Oliver & Holm-Hadulla, Fédéric & Leiner-Killinger, Nadine, 2015. "Cost of borrowing shocks and fiscal adjustment," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 23-48.
    3. repec:eee:ecmode:v:65:y:2017:i:c:p:138-146 is not listed on IDEAS
    4. S. M. Ali Abbas & Laura Blattner & Mark De Broeck & Asmaa A ElGanainy & Malin Hu, 2014. "Sovereign Debt Composition in Advanced Economies; A Historical Perspective," IMF Working Papers 14/162, International Monetary Fund.
    5. Dell' Erba, Salvatore & Mattina, Todd & Roitman, Agustin, 2015. "Pressure or prudence? Tales of market pressure and fiscal adjustment," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 196-213.
    6. Stefan Avdjiev & Stephan Binder & Ricardo Sousa, 2017. "External debt composition and domestic credit cycles," BIS Working Papers 627, Bank for International Settlements.
    7. Salvatore Dell'Erba & Todd D. Mattina & Agustin Roitman, 2013. "Pressure or Prudence? Tales of Market Pressure and Fiscal Adjustment," IMF Working Papers 13/170, International Monetary Fund.
    8. Debi Prasad Bal & Badri Narayan Rath, 2016. "Is Public Debt a Burden for India?," Economic Papers, The Economic Society of Australia, vol. 35(2), pages 184-201, June.
    9. Checherita-Westphal, Cristina & Žďárek, Václav, 2017. "Fiscal reaction function and fiscal fatigue: evidence for the euro area," Working Paper Series 2036, European Central Bank.

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