The Interest-Rate Sensitivity of the Demand for Sovereign Debt. Evidence from OECD Countries (1995-2011)

Abstract

Public debt levels in advanced economies have increased dramatically over recent years and they could put considerable upward pressure on market yields. Using a novel identification approach based on financial accounts and focusing on panel regressions for 18 advanced economies over the period 1995-2011, this paper estimates the long-term slope of the demand function for government securities in a reduced-form setting. We find that public debt does matter: each percentage point increase in the public debt to GDP ratio raises 10-year rates by about 2 basis points. The potential drag on public debt sustainability caused by the feedback loop of public debt on higher interest rates should not therefore be overlooked.

Keywords: government debt, long-term interest rates, financial accounts

JEL Classification: E43, G12, H63