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). Available at SSRN: https://ssrn.com/abstract=631001

Silvia Ardagna

National Bureau of Economic Research (NBER) ( email )

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Goldman Sachs - London ( email )

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Francesco Caselli (Contact Author)

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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National Bureau of Economic Research (NBER)

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Timothy Lane

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

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