Public deficits and borrowing costs: the missing half of market discipline
EMU driven interest rate convergence has led to a significant reduction of borrowing costs for some European governments in the second half of the nineties. The paper deals with the possible consequences for deficit behaviour. Although the impact of interest rates on deficits is a crucial element of the market discipline hypothesis it has widely been neglected in the literature. In the theoretical part, a standard political economic model of budgetary policy (Hettich-Winer) is adapted. It turns out that borrowing costs, measured as the interest-growth-differential, and the level of public debt should be important determinants for public deficits. The econometric part tests these predictions for a panel of OECD countries. The results indicate that there is indeed a significant impact of borrowing costs on the primary surplus. This impact is characterised by a robust asymmetry: Reactions in times of increasing borrowing costs are more pronounced than in times of relaxing conditions.
|Date of creation:||2001|
|Date of revision:|
|Contact details of provider:|| Postal: L 7,1; D - 68161 Mannheim|
Web page: http://www.zew.de/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Favero, Carlo A & Giavazzi, Francesco & Spaventa, Luigi, 1997.
"High Yields: The Spread on German Interest Rates,"
Royal Economic Society, vol. 107(443), pages 956-85, July.
- Carlo Favero & Francesco Giavazzi & Luigi Spaventa, 1996. "High Yields: The Spread on German Interest Rates," NBER Working Papers 5408, National Bureau of Economic Research, Inc.
- Carlo Ambrogio Favero & Francesco Giavazzi & Luigi Spaventa, . "High Yielders: the Spread on German Interest Rates," Working Papers 102, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Favero, Carlo A. & Giavazzi, Francesco & Spaventa, Luigi, 1996. "High Yields: The Spread on German Interest Rates," CEPR Discussion Papers 1330, C.E.P.R. Discussion Papers.
- Alberto Alesina & Roberto Perotti, 1995. "The Political Economy of Budget Deficits," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 1-31, March.
- Gilbert Metcalf, 1990.
"Federal Taxation and the Supply of State Debt,"
NBER Working Papers
3255, National Bureau of Economic Research, Inc.
- Barry Eichengreen and Tamim Bayoumi., 1993.
"The Political Economy of Fiscal Restrictions: Implications for Europe from the United States,"
Center for International and Development Economics Research (CIDER) Working Papers
C93-020, University of California at Berkeley.
- Eichengreen, Barry & Bayoumi, Tamim, 1994. "The political economy of fiscal restrictions: Implications for Europe from the United States," European Economic Review, Elsevier, vol. 38(3-4), pages 783-791, April.
- Timothy D. Lane, 1993. "Market Discipline," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 53-88, March.
- Giovannini, Alberto & Piga, Gustavo, 1992. "Understanding the High Interest Rates on Italian Government Securities," CEPR Discussion Papers 720, C.E.P.R. Discussion Papers.
- Hettich, W. & Winer, S.L., 1993.
"The Political Economy of Taxation,"
8, Carleton - Business Administration.
- Francesco P. Mongelli, 1997. "Effects of the European Economic and Monetary Union (EMU) on Taxation and Interest Spending of National Governments," IMF Working Papers 97/93, International Monetary Fund.
- Hettich, Walter & Winer, Stanley, 1984. "A positive model of tax structure," Journal of Public Economics, Elsevier, vol. 24(1), pages 67-87, June.
- Hettich, Walter & Winer, Stanley L, 1988. "Economic and Political Foundations of Tax Structure," American Economic Review, American Economic Association, vol. 78(4), pages 701-12, September.
- Jacob A. Frenkel & Morris Goldstein, 1990.
"Monetary Policy in an Emerging European Economic and Monetary Union; Key Issues,"
IMF Working Papers
90/73, International Monetary Fund.
- Jacob A. Frenkel & Morris Goldstein, 1991. "Monetary Policy in an Emerging European Economic and Monetary Union: Key Issues," IMF Staff Papers, Palgrave Macmillan, vol. 38(2), pages 356-373, June.
- Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States," CEPR Discussion Papers 1088, C.E.P.R. Discussion Papers.
When requesting a correction, please mention this item's handle: RePEc:zbw:zewdip:5371. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.