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

38 Pages Posted: 13 Dec 2004

See all articles by Silvia Ardagna

Silvia Ardagna

National Bureau of Economic Research (NBER); Goldman Sachs - London

Francesco Caselli

London School of Economics & Political Science (LSE) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Timothy Lane

International Monetary Fund (IMF) - Policy Development and Review Department

Multiple version iconThere are 3 versions of this paper

Date Written: November 2004

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

Keywords: Governement deficit, public debt, long-term interest rates

JEL Classification: E62, E44, H62

Suggested Citation

Ardagna, Silvia and Caselli, Francesco and Lane, Timothy, Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (November 2004). Available at SSRN: https://ssrn.com/abstract=617804 or http://dx.doi.org/10.2139/ssrn.617804

Silvia Ardagna (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Francesco Caselli

London School of Economics & Political Science (LSE) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Timothy Lane

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

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