Working Paper: CEPR ID: DP4661
Authors: Silvia Ardagna; Francesco Caselli; Timothy Lane
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; long-term interest rates; public debt
JEL Codes: E44; E62; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt-to-GDP ratio (H68) | long-term interest rates (E43) |
| fiscal policy in one OECD country (E62) | interest rates in another OECD country (E43) |
| primary deficit relative to GDP (H69) | long-term interest rates (E43) |
| primary deficit relative to GDP (H69) | long-term interest rates (E43) |