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Fiscal discipline and the cost of public debt service: some estimates for OECD countries

By Silvia Ardagna, Francesco Caselli and Timothy Lane

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. Domestic fiscal policy continues to affect domestic interest rates, however, even after controlling for worldwide debts and deficits

Topics: HG Finance
Publisher: Centre for Economic Policy Research
Year: 2004
OAI identifier: oai:eprints.lse.ac.uk:5268
Provided by: LSE Research Online
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