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

Author

Listed:
  • Ardagna Silvia

    (Harvard University)

  • Caselli Francesco

    (London School of Economics)

  • Lane Timothy

    (IMF)

Abstract

We 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.

Suggested Citation

  • 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.
    • Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:28
    DOI: 10.2202/1935-1690.1417
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    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt

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