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Government Debt, Deficits and Interest Rates 1870–2016

In: Essays in Honor of M. Hashem Pesaran: Prediction and Macro Modeling

Author

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  • Ron P. Smith

Abstract

This chapter examines the effect of changes in the public debt–gross domestic product (GDP) ratio on long, 10 year, interest rates in a panel of 17 countries over the period 1870–2016 controlling for other variables, in particular the world interest rate. Over this long period, one can argue that most of the big changes in public debt were the product of factors largely exogenous to national interest rate determination, such as war, depression or financial crisis. The issue is of current relevance since the Covid-19 pandemic has caused large increases in the ratio of public debt to GDP in many countries. The estimates suggest that it is the change in debt, rather than the level of debt or the deficit that matters for long interest rates. World interest rates have long- and short-run effects on interest rates which are very well determined and close to one. Current inflation has a small but significant effect.

Suggested Citation

  • Ron P. Smith, 2022. "Government Debt, Deficits and Interest Rates 1870–2016," Advances in Econometrics, in: Essays in Honor of M. Hashem Pesaran: Prediction and Macro Modeling, volume 43, pages 323-340, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-90532021000043a015
    DOI: 10.1108/S0731-90532021000043A015
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    More about this item

    Keywords

    Public debt; government deficits; interest rates; world interest rates; macrohistory; pandemic; C23; E43; F36; H63;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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