Government Debt-Interest Rate Nexus in G7 Countries over a Long Horizon

  • Lena Malešević-Perović University of Split, Faculty of Economics, Croatia

Abstract

The goal of this paper is to investigate the influence of government fiscal positions on long-term interest rates in G7 countries during the period 1948-2012. Our results suggest that a one percentage point increase in the stock of government debt in GDP is associated with an increase in government bond yields of 2.27-6.28 basis points, while an increase in government deficit in GDP of one percentage point is associated with an increase in government bond yields of 3.15-14.3 basis points. In addition, our results indicate that under reasonable assumptions and in the presence of widening output gaps, the neoclassical growth model predicts a rather low degree of crowding-out (around 36 percent), while the narrowing of the output gap leads to a complete crowding-out.


Key words: Government debt, Interest rate, G7, Crowding-out.
JEL: C23, E43, E62, H62, H63.

How to Cite
Malešević-Perović L. (2016). Government Debt-Interest Rate Nexus in G7 Countries over a Long Horizon. Panoeconomicus, 63(5), 603-625. doi:10.2298/PAN140724023M
Section
Scientific review