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The Effect of Government Debt, External Debt and their Interaction on OECD Interest Rates


  • David Turner


  • Francesca Spinelli



In the wake of the financial crisis there has been renewed focus on the importance of a country’s net external debt position in determining domestic interest rates and, relatedly, its vulnerability to a crisis. This paper extends the panel estimation of OECD countries described in Turner and Spinelli (2012) to investigate the effect of external debt and its interaction with government debt on the interest-rate-growth differential. The inclusion of net external debt is found to be significant in both economic and statistical terms, and of particular importance for euro area countries in the post-crisis period. The results imply that the interest-rate effect of marginal increases in external debt or government debt is non-linear and dependent on the initial levels of debt, with the interest rate effect rising sharply in the post-crisis period for euro area countries which have a combination of both high external debt and high government debt. The policy implications for those countries under financial market pressure, especially within the euro area, are that reducing external deficits and debt are at least as important as reducing government deficits and debt. In any case, the effect of higher net external debt on interest rates provides a feedback effect which may prevent countries running sustained large current account imbalances over a long period. However, evidence of an asymmetry in the effect (between the effect of net external debt and net external assets) suggests that the pressure for adjustment will apply more strongly to deficit countries. It also implies that increased polarisation of external debt positions will raise the overall level of global interest rates. L'effet de la dette publique, de la dette extérieure et de leur interaction sur les taux d'intérêt dans la zone OCDE À la suite de la crise financière, il y a eu un nouvel intérêt porté à l’importance de la position nette extérieure d’un pays dans la détermination des taux d’intérêt domestique, et par conséquent, sa vulnérabilité à une crise. Ce papier étend l’estimation de panel des pays de l’OCDE décrit dans Turner et Spinelli (2012) afin d’étudier l’effet de la dette extérieure et de son interaction avec la dette publique sur l’écart entre le taux d’intérêt et le taux de croissance. La prise en compte de la position nette extérieure apparait significative à la fois en termes économiques et statistiques, et notamment pour les pays de la zone euro dans la période postérieure à la crise. Les résultats soulignent que l’effet de la dette extérieure ou publique sur le taux d’intérêt est non linéaire et dépend des niveaux initiaux de dette ; en particulier l’effet sur le taux d’intérêt augmente beaucoup après la crise pour les pays de la zone euro du fait de la présence simultanée d’une dette extérieure et publique élevée. La conséquence en terme de politique économique pour ces pays sous pression des marchés financiers, spécialement dans la zone euro, est que la réduction des déficits et dettes extérieurs est au moins aussi importante que la réduction des déficits et dettes publics. Dans tous les cas, l’effet d’une dette extérieure nette élevée sur les taux d’intérêt se conjugue à un effet rétroactif qui peut empêcher un pays d’avoir des déséquilibres récurrents de balance courante sur une longue période. Cependant, l’existence d’une asymétrie de l’effet (entre l’effet d’une dette ou d’un surplus extérieur) suggère que la pression à l’ajustement va s’exercer plus fortement sur des pays avec des déficits. Cela implique également que la polarisation accrue sur les positions nettes extérieures va augmenter le niveau global des taux d’intérêt.

Suggested Citation

  • David Turner & Francesca Spinelli, 2013. "The Effect of Government Debt, External Debt and their Interaction on OECD Interest Rates," OECD Economics Department Working Papers 1103, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:1103-en

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    References listed on IDEAS

    1. David Turner & Francesca Spinelli, 2012. "Interest-rate-growth differentials and government debt dynamics," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 103-122.
    2. Balázs Égert, 2015. "Public debt, economic growth and nonlinear effects: Myth or reality?," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 226-238.
    3. Bruno, Giovanni S.F., 2005. "Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models," Economics Letters, Elsevier, vol. 87(3), pages 361-366, June.
    4. Antonio Di Cesare & Giuseppe Grande & Michele Manna & Marco Taboga, 2012. "Recent estimates of sovereign risk premia for euro-area countries," Questioni di Economia e Finanza (Occasional Papers) 128, Bank of Italy, Economic Research and International Relations Area.
    5. repec:ifs:fistud:v:38:y:2017:i::p:179-217 is not listed on IDEAS
    6. Anna Shabunina & Julio Escolano & Jaejoon Woo, 2011. "The Puzzle of Persistently Negative Interest Rate-Growth Differentials; Financial Repression or Income Catch-Up?," IMF Working Papers 11/260, International Monetary Fund.
    7. Calista Cheung, 2013. "Policies to support sustainable long-term growth in New Zealand," OECD Economics Department Working Papers 1076, OECD Publishing.
    8. Balázs Égert, 2014. "Fiscal policy reaction to the cycle in the OECD: pro- or counter-cyclical?," Mondes en développement, De Boeck Université, vol. 0(3), pages 35-52.
    9. Kawai, Masahiro & Morgan, Peter J., 2012. "Japan’s Post-Triple-Disaster Growth Strategy," ADBI Working Papers 376, Asian Development Bank Institute.
    10. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
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    Cited by:

    1. van Riet, Ad, 2018. "Financial repression and high public debt in Europe," Other publications TiSEM 3391dd73-357a-4071-825c-7, Tilburg University, School of Economics and Management.

    More about this item


    dette extérieure; external debt; fiscal sustainability; government debt; interest rates; interest-rate-growth differential; taux d’intérêt; viabilité budgétaire; écarts de taux d’intérêt;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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