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

32 Pages Posted: 7 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: October 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. Domestic fiscal policy continues to affect domestic interest rates, however, even after controlling for worldwide debts and deficits.

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

JEL Classification: E44, E62, 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 (October 2004). CEPR Discussion Paper No. 4661. Available at SSRN: https://ssrn.com/abstract=631001

Silvia Ardagna

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Goldman Sachs - London ( email )

130 Peterborough Court
133 Fleet Street
London, EC4A 2BB
United Kingdom

Francesco Caselli (Contact Author)

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

Houghton Street
London WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Timothy Lane

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

700 19th St. NW
Washington, DC 20431
United States
202-623-7648 (Phone)
202-623-4405 (Fax)

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