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Fiscal Deficits, Public Debt, and Sovereign Bond Yields

  • Manmohan S. Kumar
  • Emanuele Baldacci
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    The recent sharp increase in fiscal deficits and government debt in many countries raises questions regarding their impact on long-term sovereign bond yields. While economic theory suggests that this impact is likely to be adverse, empirical results have been less clear cut, have generally ignored nonlinear effects of deficits and debt through some other key determinants of yields, and have been mostly confined to advanced economies. This paper reexamines the impact of fiscal deficits and public debt on long-term interest rates during 1980 - 2008, taking into account a wide range of country-specific factors, for a panel of 31 advanced and emerging market economies. It finds that higher deficits and public debt lead to a significant increase in long-term interest rates, with the precise magnitude dependent on initial fiscal, institutional and other structural conditions, as well as spillovers from global financial markets. Taking into account these factors suggests that large fiscal deficits and public debts are likely to put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/184.

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    Length: 28
    Date of creation: 01 Aug 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/184
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    1. Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government Debt," Harvard Institute of Economic Research Working Papers 1820, Harvard - Institute of Economic Research.
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    2. Balduzzi, Pierluigi & Corsetti, Giancarlo & Foresi, Silverio, 1997. "Yield-curve movements and fiscal retrenchments," European Economic Review, Elsevier, vol. 41(9), pages 1675-1685, December.
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    9. Paesani, Paolo & Strauch, Rolf & Kremer, Manfred, 2006. "Public debt and long-term interest rates: the case of Germany, Italy and the USA," Working Paper Series 0656, European Central Bank.
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    14. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
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    17. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
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