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Deteriorating Public Finances and Rising Government Debt: Implications for Monetary Policy

  • Lillian Cheung

    (Research Department, Hong Kong Monetary Authority)

  • Chi-Sang Tam

    (Research Department, Hong Kong Monetary Authority)

  • Jessica Szeto

    (Research Department, Hong Kong Monetary Authority)

Registered author(s):

    The sharp rise in government debt in many major economies following the introduction of large fiscal stimulus measures during the global financial crisis of 2008-09 has triggered concerns over its impact on long-term interest rates and the potential negative consequences for future growth and inflation. This paper uses an error-correction model to assess the effect of growing government debt on long-term real interest rates by drawing on empirical evidence from the US. The results show that in the long run, a one-percentage-point increase in the federal debt-to-GDP ratio raises the equilibrium 10-year real US Treasury yield by about six basis points. We also discuss the economic consequences of a rise in the world long-term interest rates, and draw implications for longer-term growth and the conduct of monetary policy in the Asian economies.

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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP09_15_full.pdf
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    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0915.

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    Length: 18 pages
    Date of creation: Aug 2009
    Date of revision:
    Handle: RePEc:hkg:wpaper:0915
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    1. Anne-Marie Brook, 2003. "Recent and Prospective Trends in Real Long-Term Interest Rates: Fiscal Policy and other Drivers," OECD Economics Department Working Papers 367, OECD Publishing.
    2. Joseph E. Gagnon, 1996. "Net foreign assets and equilibrium exchange rates: panel evidence," International Finance Discussion Papers 574, Board of Governors of the Federal Reserve System (U.S.).
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