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

   (342 K)

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.

Published: Ardagna, Silvia, Francesco Caselli, and Timothy Lane. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries." B.E. Journal of Macroeconomics: Topics in Macroeconomics 7, 1 (2007).

This paper is available as PDF (342 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX