Working Paper: NBER ID: w10788
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. However, domestic fiscal policy continues to affect domestic interest rates even after controlling for worldwide debts and deficits.
Keywords: fiscal policy; public debt; interest rates
JEL Codes: H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| primary deficit relative to GDP (H69) | long-term interest rates (E43) |
| government debt (H63) | long-term interest rates (E43) |
| worsening public finances abroad (H69) | national interest rates (E43) |
| fiscal variables (E62) | interest rates (E43) |