The Impact of Government Borrowing Costs on Fiscal Discipline

26 Pages Posted: 28 May 2020

See all articles by Olegs Tkacevs

Olegs Tkacevs

Latvijas Banka

Kārlis Vilerts

affiliation not provided to SSRN

Date Written: August 2019

Abstract

This paper studies the impact of government borrowing costs on fiscal discipline against the background of unprecedentedly low interest rates in advanced economies brought about by ultra‐expansionary monetary policies of recent years. Applying the panel data econometric approach for a sample of OECD and 11 early euro area countries over the period 1985–2015, the study suggests a positive and statistically significant impact of government borrowing costs on cyclically adjusted primary balances, indicating that a decrease in borrowing costs leads to a deterioration of fiscal policy stance. The findings herein also suggest that this effect in the euro area seems to be driven by a group of its peripheral rather than core countries and appears to work through the expenditure (more specifically, current expenditure) channel. From the economic policy perspective, these findings imply that monetary policy measures resulting in ultra‐low interest rates may cause negative side effects for fiscal discipline.

Suggested Citation

Tkacevs, Olegs and Vilerts, Kārlis, The Impact of Government Borrowing Costs on Fiscal Discipline (August 2019). Kyklos, Vol. 72, Issue 3, pp. 446-471, 2019, Available at SSRN: https://ssrn.com/abstract=3613093 or http://dx.doi.org/10.1111/kykl.12207

Olegs Tkacevs (Contact Author)

Latvijas Banka ( email )

K. Valdemara iela 2a
Riga LV-1050
Latvia

Kārlis Vilerts

affiliation not provided to SSRN

No Address Available

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