Public Debt in Advanced Economies and its Spillover Effectson Long-Term Yields

IMF Working Papers, August 1, 2011

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Several models establish a positive association between public debt ratios and long-term real yields, but the empirical evidence is not always conclusive.
This paper reconsiders the association, focusing on possible spillover effects of large advanced economies' debt levels to other economies' borrowing yields, especially in emerging markets.
The authors extend the existing literature by using real time expectations of fiscal and other macroeconomic variables for a large sample of advanced and emerging economies.
Key empirical finding: an increase in the public debt levels of large advanced economies—especially the United States—spills over to both emerging markets and other advanced economies' long-term real yields.
The spillover effect is significant at the current levels of advanced economies' debt ratios.

Uses real time expectations of fiscal and other macroeconomic variables.
Covers a large sample of advanced and emerging economies.
Emphasis on identifying cross-border spillovers from large advanced economies' debt levels to other countries' long-term real yields.

Subjects: Domestic debt, Financial services, Government debt management, Long term interest rates, Public debt, Public financial management (PFM), Real interest rates
Keywords: debt, debt level, debt ratio, debt ratio level, debt ratio value, debt to GDP ratio, Domestic debt, EMBI, EMEs' yield, Global, Government debt management, increases in advanced economies public debt debt ratio, interest rate channel, Long term interest rates, long-term real rates, public debt, public debt debt ratio, rate, Real interest rates, real rate, spillover effect, Spillovers, WP, yield