Fiscal Deficits, Public Debt, and Sovereign Bond Yields

29 Pages Posted: 1 Sep 2010

See all articles by Emanuele Baldacci

Emanuele Baldacci

International Monetary Fund (IMF) - Fiscal Affairs Department

Manmohan Kumar

International Monetary Fund (IMF) - Research Department

Date Written: August 2010

Abstract

The recent sharp increase in fiscal deficits and government debt in many countries raises questions regarding their impact on long-term sovereign bond yields. While economic theory suggests that this impact is likely to be adverse, empirical results have been less clear cut, have generally ignored nonlinear effects of deficits and debt through some other key determinants of yields, and have been mostly confined to advanced economies. This paper reexamines the impact of fiscal deficits and public debt on long-term interest rates during 1980 - 2008, taking into account a wide range of country-specific factors, for a panel of 31 advanced and emerging market economies. It finds that higher deficits and public debt lead to a significant increase in long-term interest rates, with the precise magnitude dependent on initial fiscal, institutional and other structural conditions, as well as spillovers from global financial markets. Taking into account these factors suggests that large fiscal deficits and public debts are likely to put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term.

Suggested Citation

Baldacci, Emanuele and Kumar, Manmohan, Fiscal Deficits, Public Debt, and Sovereign Bond Yields (August 2010). IMF Working Papers, Vol. , pp. 1-28, 2010. Available at SSRN: https://ssrn.com/abstract=1669865

Emanuele Baldacci (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Manmohan Kumar

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7771 (Phone)
202-589-7771 (Fax)

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