Government Debt and Long-Term Interest Rates

25 Pages Posted: 26 Apr 2006

Date Written: March 2006

Abstract

This paper examines the relationship between government debt and long-term interest rates. A dynamic general equilibrium model that incorporates debt nonneutrality is specified and solved, and numerical simulations using the model are undertaken. In addition, empirical evidence using panel data for 19 industrial countries is examined. The estimation provides some evidence supporting the theoretical predictions: the paper finds that the simulated and estimated interest rate effects of government debt tend to be small. However, an increase in government consumption and debt leads to a considerably larger effect. The paper also argues that, although the interest rate effects of pure crowding out may be limited, the economic impact of accumulating government debt cannot be ignored.

Keywords: Government debt, long-term interest rates, dynamic general equilibrium model

JEL Classification: E43, E62, H63

Suggested Citation

Kinoshita, Noriaki, Government Debt and Long-Term Interest Rates (March 2006). IMF Working Paper No. 06/63, Available at SSRN: https://ssrn.com/abstract=898724

Noriaki Kinoshita (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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