Public Debt and Long-Term Interest Rates: The Case of Germany, Italy and the USA

48 Pages Posted: 1 Aug 2006

See all articles by Rolf Strauch

Rolf Strauch

European Central Bank (ECB)

Manfred Kremer

European Central Bank (ECB)

Paolo Paesani

University of Rome - Tor Vergata - Department of Economics and Institutions

Date Written: July 2006

Abstract

The debate on the sustainability of public finances is closely related to the analysis of the financial and macroeconomic consequences of government debt accumulation. Focusing on the USA, Germany and Italy over the 1983-2003 period, the central issue addressed in this paper is how the accumulation of government debt affects long-term interest rates, both nationally and across borders. The analysis is based on a small, multivariate econometric model, which allows us to disentangle the more permanent and transitory components of interest rate developments. Empirical evidence shows that in all cases a more sustained debt accumulation leads at least temporarily to higher long-term interest rates. This transitory impact also spills-over into other countries, mainly from the US to the two European countries.

Keywords: Public debt, Long-Term Interest Rates, Cointegration, Common Trends

JEL Classification: E6, H63

Suggested Citation

Strauch, Rolf and Kremer, Manfred and Paesani, Paolo, Public Debt and Long-Term Interest Rates: The Case of Germany, Italy and the USA (July 2006). ECB Working Paper No. 656. Available at SSRN: https://ssrn.com/abstract=913327

Rolf Strauch (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Manfred Kremer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7065 (Phone)

Paolo Paesani

University of Rome - Tor Vergata - Department of Economics and Institutions ( email )

Via Columbia n. 2
00133 Rome
Italy

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