A BEJM Topics article.

Abstract

We use a panel of 16 OECD countries over several decades to investigate the effects of government debts and deficits on long-term interest rates. In simple static specifications, a one-percentage-point increase in the primary deficit relative to GDP increases contemporaneous long-term interest rates by about 10 basis points. In a vector autoregression (VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10 years. The effect of debt on interest rates is non-linear: only for countries with above-average levels of debt does an increase in debt affect the interest rate. World fiscal policy is also important: an increase in total OECD-government borrowing increases each country's interest rates. However, domestic fiscal policy continues to affect domestic interest rates even after controlling for worldwide debts and deficits.

Submitted: February 14, 2006 · Accepted: December 22, 2006 · Published: August 15, 2007

Recommended Citation

Ardagna, Silvia; Caselli, Francesco; and Lane, Timothy (2007) "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics: Vol. 7 : Iss. 1 (Topics), Article 28.
Available at: http://www.bepress.com/bejm/vol7/iss1/art28