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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

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1935-1690
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Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries

Silvia Ardagna / Francesco Caselli / Timothy Lane
Published Online: 2007-08-15 | DOI: https://doi.org/10.2202/1935-1690.1417

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.

Keywords: government deficit; public debt; long-term interest rates

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Published Online: 2007-08-15


Citation Information: The B.E. Journal of Macroeconomics, Volume 7, Issue 1, ISSN (Online) 1935-1690, DOI: https://doi.org/10.2202/1935-1690.1417.

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