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

Ardagna, Silvia; Caselli, Francesco; Lane, Timothy

doi:10.2202/1935-1690.1417

Cited by 148 publications

(124 citation statements)

References 56 publications

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“…This is true especially for the longer period, for which the coefficient on the upper regime debt ratio is highly statistically significant and positive. These results are broadly in line with Ardagna et al (2007): using debt in a quadratic functional form, they find a non-linear effect of public debt on long-term interest rates, with a negative impact when the debt-to-GDP ratio is below 65% and a positive impact when the ratio is above this threshold. 19 The resulting crowding-out of economic activity helps explaining why the impact of additional debt on the economy decreases with the size of debt, and might even become negative above certain threshold values.…”

Section: Influence On the Interest Ratesupporting

confidence: 88%

“…In turn, this may lead to an increase in private interest rates and a decrease in private spending growth, both by households and firms (see Elmendorf and Mankiw 1999), which is likely to dampen output growth. While the empirical findings on the relationship between public debt and long-term interest rates are diverse, a significant number of recent studies suggest that high debt may contribute to rising sovereign yield spreads (see Codogno et al 2003;Schuknecht et al 2010 andAttinasi et al 2009, among others) and ultimately sovereign long-term interest rates (Ardagna et al 2007, Laubach 2009). …”

Section: Influence On the Interest Ratementioning

confidence: 99%

“…The explanatory variables are broadly in line with Ardagna et al (2007). 17 Both interest rate series are de-trended, applying linear trend filtering from 1990.…”

Section: Influence On the Interest Ratementioning

confidence: 99%

“…Below this threshold, the impact of additional debt decreases the long-run interest rates. 18 Once the threshold is reached, we observe 17 Ardagna et al (2007) estimate the response of long-term interest rates in a panel of 16 OECD countries, over the years 197516 OECD countries, over the years -2002. Comparable to our specification, they use the nominal interest rate on 10-year government bonds as the dependent variable, and GDP growth, interest rates on 3-month Treasury bills, inflation and deficit as explanatory variables, a baseline specification which is close to the one employed in our paper.…”

Section: Influence On the Interest Ratementioning

confidence: 99%

“…18 For a detailed discussion on reasons for the negative impact of debt on interest rates below a threshold value, we refer to section 3, specifically 3.2 in Ardagna et al (2007).…”

Section: Influence On the Interest Ratementioning

confidence: 99%

See 4 more Smart Citations

Debt and growth: New evidence for the euro area

Baum

Checherita‐Westphal

Rother

2013

Journal of International Money and Finance

395

260

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Against the background of the euro area sovereign debt crisis, our paper investigates the relationship between public debt and economic growth and adds to the existing literature in the following ways. First, we use a dynamic threshold panel methodology in order to analyse the non-linear impact of public debt on GDP growth. Second, we focus on 12 euro area countries for the period 1990-2010, therefore adding to the current discussion on debt sustainability in the euro area. Our empirical results suggest that the short-run impact of debt on GDP growth is positive and highly statistically significant, but decreases to around zero and loses significance beyond public debt-to-GDP ratios of around 67%. This result is robust throughout most of our specifications, in the dynamic and non-dynamic threshold models alike. For high debt-to-GDP ratios (above 95%), additional debt has a negative impact on economic activity. Furthermore, we can show that the long-term interest rate is subject to increased pressure when the public debt-to-GDP ratio is above 70%, broadly supporting the above findings.Keywords: Public debt, economic growth, fiscal policy, threshold analysis JEL Classification: H63, O40, E62, C20 1 2 Non-technical summaryThe fiscal situation remains challenging in much of the developed world, particularly in the euro area. Market concerns with respect to fiscal sustainability in vulnerable euro area countries have grown and spread to other countries. Against this background, empirical research has started to focus on estimates of the impact of public debt on economic activity.Looking at the debt-growth nexus literature, two characteristics become apparent. First, only few studies focus on euro area countries. This is insofar surprising as the euro area/EMU offers economic dynamics that are rarely found anywhere else in the world. Moreover, this group of countries is in need of special attention given the current sovereign debt crisis. Second, most of the empirical studies still rely on linear estimation frameworks. Only more recently has the focus been shifting to nonlinear threshold analyses, inter alia by employing the threshold panel methodology developed by Hansen (1999). However, all of these studies focus exclusively on nondynamic panel models, which might lead to inconsistent results due to the persistence of GDP growth rates. To our best knowledge our paper is the first to account for this problem through application of a dynamic threshold framework. Comparing the results from dynamic and non-dynamic threshold estimations provides an idea not only about the robustness of the impact of debt on growth, but also about the robustness of the estimated optimal debt ratios.Our paper adds to the existing literature in the following ways. First, we use a dynamic threshold panel methodology in order to analyse the non-linear impact of public debt on GDP growth. Second, in comparison to the majority of empirical studies we analyse the short-run relationship between public debt and economic growth using yearly...

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Section: Influence On the Interest Ratesupporting

confidence: 88%

Section: Influence On the Interest Ratementioning

confidence: 99%

“…The explanatory variables are broadly in line with Ardagna et al (2007). 17 Both interest rate series are de-trended, applying linear trend filtering from 1990.…”

Section: Influence On the Interest Ratementioning

confidence: 99%

Section: Influence On the Interest Ratementioning

confidence: 99%

“…18 For a detailed discussion on reasons for the negative impact of debt on interest rates below a threshold value, we refer to section 3, specifically 3.2 in Ardagna et al (2007).…”

Section: Influence On the Interest Ratementioning

confidence: 99%

See 3 more Smart Citations

Debt and growth: New evidence for the euro area

Baum

Checherita‐Westphal

Rother

2013

Journal of International Money and Finance

395

260

View full text Add to dashboard Cite

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Forecasting sovereign risk in the Euro area via machine learning

Belly

Boeckelmann

Graciano

et al. 2023

Journal of Forecasting

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We test the usefulness of machine learning (ML) for the valuation and pricing of sovereign risk in the Euro area along two important dimensions: i) its predictive accuracy compared with traditional econometric methods, and ii) its assessment of the main economic factors underlying market perceptions of sovereign risk.We find that ML techniques can capture the dynamics inherent in the market valuation of country risk far more efficiently than traditional econometric models, both in the cross-section and in the time series. Moreover, we show that public sentiment about financial news, redenomination fears and the degree of hawkishness/dovishness expressed in the ECB president's speeches are major contributors to sovereign bond spreads. We also confirm that macroeconomic and global financial factors affect sovereign risk assessment and the corresponding formation of sovereign spreads.

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Determinants of the Portuguese government bond yields

Pinho

Barradas

2020

Int. J Fin Econ

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This paper conducts an empirical examination of the determinants of the 10‐, 5‐ and 1‐year Portuguese government bond yields by performing a time series econometric analysis for the period between the first quarter of 2000 and the last quarter of 2016. The literature suggests that the evolution of government bond yields depends on three main risk drivers, namely credit risk, global risk aversion and liquidity risk. We estimate three equations for the 10‐, 5‐ and 1‐year Portuguese government bond yields, including eight independent variables (macroeconomic performance, fiscal conditions, foreign borrowing, the inflation rate, labour productivity, the demographic situation, global risk aversion and liquidity risk) to take into account all three risk drivers referred to in the literature. Our results show that there are no significant differences in the determinants of the Portuguese government bond yields among the different maturities, either in the long term or in the short term. Our results also confirm that all three of the risk drivers have exerted a strong influence on the evolution of the Portuguese government bond yields. Liquidity risk, foreign borrowing and the inflation rate are the main triggers of the rise in the Portuguese government bond yields, which does not counterweigh the beneficial effects played by the fiscal conditions, labour productivity and demographic situation.

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

Cited by 148 publications

References 56 publications

Debt and growth: New evidence for the euro area

Debt and growth: New evidence for the euro area

Forecasting sovereign risk in the Euro area via machine learning

Determinants of the Portuguese government bond yields

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