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

  • Ardagna Silvia

    ()

    (Harvard University)

  • Caselli Francesco

    ()

    (London School of Economics)

  • Lane Timothy

    ()

    (IMF)

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.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 (August)
Pages: 1-35

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Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:28
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