Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152845
Authors: 
Ardagna, Silvia
Caselli, Francesco
Lane, Timothy
Year of Publication: 
2004
Series/Report no.: 
ECB Working Paper 411
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.
Subjects: 
Governement deficit
long-term interest rates
public debt
JEL: 
E62
E44
H62
Document Type: 
Working Paper

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