Skip to main content
SpringerLink
Log in
Book cover

Economic Spillovers, Structural Reforms and Policy Coordination in the Euro Area pp 55–106Cite as

Budgetary spillovers and long-term interest rates

  • Chapter

Part of the book series: Contributions to Economics ((CE))

Abstract

The effect of fiscal expansions on interest rates has commanded enormous theoretical interest, but the hypothesis of crowding out has received only some — albeit not very robust — empirical endorsement. Most economists would nevertheless agree with the position that consolidating public finances reduces pressure on long-term interest rates and will be conducive to economic growth in the long run by stimulating private investment (Gale and Orszag, 2003). The crowding out premise is also an important motivation for the consolidation of public finances, as is evident from the policies advocated by both the European Commission and the European Central Bank.

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   84.99
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD   109.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD   109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  • Afonso, A. and Strauch, R., (2003), Fiscal policy events and interest rate swaps spreads: some evidence from EU’, ECB working paper no. 303.

    Google Scholar 

  • Ahmed, S. and Rogers, J., (1995), Government budget deficits and trade deficits. Are present value constraints satisfied in long term data?, Journal of Monetary Economics, vol. 36, p. 351–374.

    Article  Google Scholar 

  • Alesina, A., De Broeck, M., Prati, A., and Tabellini, G., (1992), Default risk on government debt in OECD countries, Economic Policy, vol. 15, p. 427–463.

    Article  Google Scholar 

  • Alesina, A., Ardagna, S., Perotti, R., and Schiantarelli, F., (1999), Fiscal policy, profits and investment, American Economic Review, vol. 92(3), p. 571–589.

    Article  Google Scholar 

  • Ardagna, S., Caselli, F., and Lane, T., (2004), Fiscal discipline and the cost of public debt service, NBER working paper no. 10788.

    Google Scholar 

  • Barth, J., Iden, G., Russek, F. and Wohar, M., (1991), The effects of federal budget deficits on interest rates and the composition of domestic output, in: Penner, R., (ed.), The great fiscal experiment, Washington D.C.: Urban Institute Press, p. 69–141.

    Google Scholar 

  • Bayoumi, T., Goldstein, M. and Woglom, G., (1995), Do credit markets discipline sovereign borrowers? Evidence from the US States, Journal of Money, Credit and Banking, vol.27(4), p.1046–1059.

    Article  Google Scholar 

  • Beetsma, R., and Bovenberg, L., (1999), Does monetary unification lead to excessive debt accumulation?, Journal of Public Economics, vol. 74, p. 299–325.

    Article  Google Scholar 

  • Beetsma, R., and Jensen, H., (2004), Mark-up fluctuations and fiscal policy stabilization in a monetary union, Journal of Macroeconomics, vol. 26, p. 357–376.

    Article  Google Scholar 

  • Beetsma, R., and Vermeylen, K., (2002), The effect of monetary unification on public debt and its real return, CEPR discussion paper no. 3491.

    Google Scholar 

  • Beetsma, R., Giuliodori, M., and Klaassen, F., (2005), Trade spillover of fiscal policy in the European Union: a panel analysis, CEPR discussion paper no. 5222.

    Google Scholar 

  • Bernheim, B., (1987), Ricardian equivalence: an evaluation of theory and evidence, in: Fisher, S. (ed.), NBER Macroeconomics Annual, Cambridge, Mass.: MIT Press, p. 263–304.

    Google Scholar 

  • Bernoth, K., Von Hagen, J. and Schuhknecht, L., (2004), The determinants of the yield differential in the EU government bond market, CEPR discussion paper no. 4465.

    Google Scholar 

  • Blanchard, O. and Perotti, R., (2002), An empirical characterisation of the dynamic effects of changes in government spending and taxes on output, Quarterly Journal of Economics, vol. 117(4), p. 1329–1368.

    Article  Google Scholar 

  • Bohn, H., (1998), The behaviour of US public debt and deficits, Quarterly Journal of Economics, vol. 113(3), p. 949–963.

    Article  Google Scholar 

  • Brook, A., (2003), Recent and prospective trends in real long-term interest rates: fiscal policy and other drivers, OECD Economics Department working paper no. 21.

    Google Scholar 

  • Canzoneri, M., Cumby, R., and Diba, B., (2001), Fiscal discipline and exchange rate regimes, The Economic Journal, vol. 111, p. 667–690.

    Article  Google Scholar 

  • Canzoneri, M., Cumby, R., and Diba, B., (2001), Is the price level determined by the needs of fiscal solvency?, American Economic Review, vol. 91(5), p. 1221–1238.

    Article  Google Scholar 

  • Canzoneri, M., Cumby, R., and Diba, B., (2002), Should the European Central Bank and the Federal reserve be concerned about fiscal policy?, in: Rethinking stabilization policy, Federal Reserve Bank of Kansas City, p. 333–389.

    Google Scholar 

  • Caporale, G., and Williams, G., (2002), Long-term nominal interest rates and domestic fundamentals, Review of Financial Economics, vol. 11, p. 119–130.

    Article  Google Scholar 

  • Cebula, R., (1998), an empirical analysis of the impact of federal budget deficits on long-term nominal interest rate yields: using alternative expected inflation measures, Review of Financial Economics, vol. 7(1), p. 55–64.

    Article  Google Scholar 

  • Cebula, R., and Koch, J., (1989), An empirical note on deficits, interest rates, and international capital flows, Quarterly Review of Economics and Business, vol. 29(3), p. 121–127.

    Google Scholar 

  • Chang, R., (1990), International coordination of fiscal deficits, Journal of Monetary Economics, vol. 25, p. 347–366.

    Article  Google Scholar 

  • Codogno, L., Favero, C., and Missale, A., (2003), Yield spreads on EMU government bonds, Economic Policy, p. 503–532.

    Google Scholar 

  • Conway, P., and Orr, A., (2002), The GIRM: a global interest rate model, Westpac Institutional Bank Occasional Paper.

    Google Scholar 

  • Copeland, L. and Jones, S., (2001), Default probabilities of European sovereign debt: market-based estimates, Applied Economics Letters, vol. 8, p. 321–324.

    Article  Google Scholar 

  • Dai, Q., and Phillipon, T., (2005), Fiscal policy and the term structure of interest rates, NBER working paper series no. 11574.

    Google Scholar 

  • Drudi, F. and Prati, A., (2000), Signaling fiscal regime sustainability, European Economic Review, vol. 44(10), p. 1897–1930.

    Article  Google Scholar 

  • Elmendorf, D., (1993), Actual budget deficit expectations and interest rates, Harvard Institute of Economic Research.

    Google Scholar 

  • Elmendorf, D., (1996), The effect of deficit reduction laws on real interest rates, Federal Reserve Board, Finance and Economics discussion paper no. 44.

    Google Scholar 

  • Elmendorf, D., and Mankiw, N., (1999), Government debt, in: Taylor, J., and Woodford, M., (eds.), Handbook of Macroeconomics, Amsterdam: Elsevier Science, Chapter 25.

    Google Scholar 

  • Engen, E., and Hubbard, G., (2004), Federal government debt and interest rates, NBER working paper no. 10681.

    Google Scholar 

  • European Commission, (2004), Public Finances in EMU, European Economy, Directorate General for Economic and Financial Affairs, vol. 3.

    Google Scholar 

  • Evans, P., and Marshall, D., (2002), Economic determinants of the nominal Treasury yield curve, Federal Reserve Bank of Chicago, working paper no. 16.

    Google Scholar 

  • Evans, P., (1987a), Interest rates and expected future budget deficits in the US, Journal of Political Economy, vol. 95(1).

    Google Scholar 

  • Evans, P., (1987b), Do budget deficits raise nominal interest rates? Evidence from six countries, Journal of Monetary Economics, vol. 20, p. 281–300.

    Article  Google Scholar 

  • Fagan, G., Henry, J., and Mestre, R., (2001), An Area-Wide Model (AWM) for the Euro Area, ECB working paper no. 42.

    Google Scholar 

  • Faini, R., (2006), Fiscal policy and interest rates in Europe, Economic Policy (forthcoming).

    Google Scholar 

  • Favero, C., (2003), How do European monetary and fiscal authorities behave?, in: Buti, M., (ed.), Monetary and fiscal policies in EMU: Interactions and coordination, Cambridge: Cambridge University Press, p. 217–245.

    Google Scholar 

  • Favero, C., Giavazzi, F., and Spaventa, L., (1997), High yields: the spread on German interest rates, Economic Journal, vol. 107, p. 956–985.

    Article  Google Scholar 

  • Feldstein, M., (1986), Budget deficits, tax rules and real interest rates, NBER working paper no. 1970.

    Google Scholar 

  • Ford, R., and Laxton, D., (1999), World public debt and real interest rates, Oxford Review of Economic Policy, vol. 15(2), p. 77–94.

    Article  Google Scholar 

  • Friedman, B., (2005), Deficits and debt in the short and long run, NBER working paper no. 11630.

    Google Scholar 

  • Fry, R., and Pagan, A., (2005), Some issues in using VARs for macro-econometric research, Centre for Applied Macroeconomic Analysis working paper no. 18.

    Google Scholar 

  • Gale, W., and Orszag, P., (2002), The economic effects of long-term fiscal discipline, Brookings Institution.

    Google Scholar 

  • Ganelli, G., (2005), The New Open Economy Macroeconomics of government debt, Journal of International Economics, vol. 65(1), p. 167–184.

    Article  Google Scholar 

  • Giuliodori, M., and Beetsma, R., (2005), What are the spillovers from fiscal shocks in Europe? An empirical analysis, De Economist, vol. 153(2), p. 167–197.

    Article  Google Scholar 

  • Hansen, L., Roberds, W., and Sargent, T., (1991), Time series implications of present value budget balance and of martingale models of consumption and taxes, in: Hansen, L., and Sargent, T., (eds.), Rational expectations econometrics, Westview Press: Colombia, Boulder, p. 121–162.

    Google Scholar 

  • Heppke-Falk, K. and Hueffner, F., (2004), Expected budget deficits and interest rate swap spreads — evidence for France, Germany and Italy, Deutsche Bundesbank discussion paper no. 40.

    Google Scholar 

  • Kitchen, J., (1996), Domestic and international financial market responses to federal deficit announcements, Journal of International Money and Finance, vol. 15, p. 239–254.

    Article  Google Scholar 

  • Kitchen, J., (2002), A note on interest rates and structural budget deficits, mimeo.

    Google Scholar 

  • Knot, K., and De Haan, J., (1995), Fiscal policy and interest rates in the European Community, European Journal of Political Economy, vol. 11, p. 171–187.

    Article  Google Scholar 

  • Knot, K., (1996), Fiscal policy and interest rates in the European Union, Cheltenham: Edward Elgar Publishing.

    Google Scholar 

  • Landon, S., and Smith, C., (2000), Government debt spillover and creditworthiness in a federation, The Canadian Journal of Economics, vol. 33(3), p. 364–661.

    Google Scholar 

  • Laubach, T., (2003), New evidence on the interest rate effects of budget deficits and debt, mimeo, Board of Governors of the Federal Reserve System.

    Google Scholar 

  • Linde, J., (2001), Fiscal policy and interest rates in a small open economy, Finnish Economic Paper, vol. 14(2).

    Google Scholar 

  • Marcellino, M., (2002), Some stylised facts on non-systematic fiscal policy in the Euro-area, CEPR discussion paper no. 3635.

    Google Scholar 

  • Miller, S., and Russek, F., (1996), Do federal deficits affect interest rates? Evidence from three econometric methods, Journal of Macroeconomics, vol. 18(3), p. 403–428.

    Article  Google Scholar 

  • Mountford, A., and Uhlig, H., (2005), What are the effects of fiscal policy shocks?, SFB649 discussion paper no. 39.

    Google Scholar 

  • Nicoletti, G., (1989), A cross-country analysis of private consumption, inflation and the debt neutrality hypothesis, OECD Economic Studies, no. 11, p. 43–87.

    Google Scholar 

  • O’Donovan, B., Orr, A., and Rae, D., (1996), A world interest rate model, National Bank of New Zealand, Financial Research Paper no. 7.

    Google Scholar 

  • Orr, A., Edey, M., and Kennedy, M., (1995), The determinants of real long-term interest rates: 17 country pooled time series evidence, OECD working paper no. 155.

    Google Scholar 

  • Paesani, P., Strauch, R., and Kremer, M., (2006), Public debt and long-term interest rates: the case of Germany, Italy and the USA, ECB working paper no. 656.

    Google Scholar 

  • Perotti, R., (2005), Estimating the effects of fiscal policy in OECD countries, CEPR working paper no. 4842.

    Google Scholar 

  • Prasad, E., and Lumsdaine, R., (2003), Identifying the common component of international economic fluctuations: a new approach, Economic Journal, vol. 113, p. 101–127.

    Article  Google Scholar 

  • Ramey, V., and Shapiro, M., (1998), Costly capital reallocation and the effects of government spending, Carnegie Rochester Conference on Public Policy, vol. 48, p. 145–194.

    Article  Google Scholar 

  • Reinhart, V., and Sack, B., (2000), The economic consequences of disappearing government debt, Brookings Papers on Economic Activity, vol. 2, p. 163–209.

    Article  Google Scholar 

  • Sims, C., (1988), Identifying policy effects, in: Bryant, R., Henderson, D., Holtman, G., Hooper, P., and Symansky, S., (eds.), Empirical macroeconomics for independent economies, The Brookings Institutions, Washington D.C., p. 305–321.

    Google Scholar 

  • Sims, C., Stock, J., and Watson, M., (1990), Inference in time series models with some unit roots, Econometrica, vol. 58, p. 113–144.

    Article  Google Scholar 

  • Tanzi, V., and Lutz, M., (1993), Interest rates and government debt: are the linkages global rather than national?, in: Verbon, H., and Van Winden, F., The Political Economy of Government Debt, Amsterdam: Elsevier Science, p. 233–253.

    Google Scholar 

  • Tavares, J., and Valkanov, R., (2001), The neglected effect of fiscal policy on stock and bond returns, mimeo, UCLA.

    Google Scholar 

  • Wachtel, P., and Young, J., (1987), Deficit announcements and interest rates, American Economic Review, vol. 77, p. 1007–1012.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Facultat de Ciències Econòmiques i Empresarials, Universitat de Barcelona, E-08034, Barcelona, Spain

    Peter Claeys

Authors
  1. Peter Claeys
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

Copyright information

© 2008 Physica-Verlag Heidelberg

About this chapter

Cite this chapter

Claeys, P. (2008). Budgetary spillovers and long-term interest rates. In: Economic Spillovers, Structural Reforms and Policy Coordination in the Euro Area. Contributions to Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-1970-0_3

Download citation

Publish with us

Policies and ethics

Search

Navigation