Fiscal Deficits, Public Debt, and Sovereign Bond Yields
IMF Working Papers, August 1, 2010
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- Fiscal Deficits, Public Debt, and Sovereign Bond Yields
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Bibliographic details
- Authors: Manmohan S. Kumar, Emanuele Baldacci
- Published: August 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455202188.001
Summary and research question
- Reexamines the impact of fiscal deficits and public debt on long-term interest rates.
- Covers the period 1980 - 2008 for a panel of 31 advanced and emerging market economies.
- Motivated by the recent sharp increase in fiscal deficits and government debt and by inconclusive prior empirical results that often ignored nonlinear effects and were mostly confined to advanced economies.
Methodology and scope
- Empirical analysis accounting for a wide range of country-specific factors.
- Explicitly considers nonlinear effects of deficits and debt through other key determinants of yields.
- Incorporates spillovers from global financial markets in the estimation framework.
Key findings
- Higher deficits and public debt lead to a significant increase in long-term interest rates.
- The precise magnitude of the impact depends on:
- Initial fiscal conditions.
- Institutional conditions.
- Other structural conditions.
- Spillovers from global financial markets.
- Taking these factors into account suggests that large fiscal deficits and public debts are likely to put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term.