Arbeitspapier
Fiscal adjustment and the costs of public debt service: Evidence from OECD countries
We use a panel of 21 OECD countries from 1970 to 2009 to investigate the effects of different fiscal adjustment strategies on long-term interest rates - a key fiscal indicator reflecting the costs of government debt service. A government confronted with high deficits and rising debt will sooner or later need to enact fiscal adjustments in order to avoid solvency problems. Over the last four decades, such measures taken by governments in OECD countries have varied in duration, size, composition and in their success to re-establish fiscal sustainability. Controlling for various economic, fiscal and political factors, we find that the size and the composition of a fiscal adjustment significantly affect interest rates as well as yield spreads. Adjustments that are relatively large and those that primarily depend on expenditure cuts lead to substantially lower long-term interest rates. However, periods of fiscal adjustments do not generally have an influence on interest rates, even if they were successful and led to lower deficits and debt levels. Instead, financial markets only seem to value strict and decisive measures - a clear sign that the government's pledge to cut the deficit is credible.
- Language
-
Englisch
- Bibliographic citation
-
Series: CESifo Working Paper ; No. 3297
- Classification
-
Wirtschaft
Fiscal Policy
Public Economics: General
National Budget, Deficit, and Debt: General
- Subject
-
fiscal adjustment
consolidation policy
government debt
deficit
interest rates
Haushaltskonsolidierung
Nachhaltigkeit
Zins
Volatilität
Öffentliche Schulden
OECD-Staaten
- Event
-
Geistige Schöpfung
- (who)
-
Schaltegger, Christoph A.
Weder, Martin
- Event
-
Veröffentlichung
- (who)
-
Center for Economic Studies and ifo Institute (CESifo)
- (where)
-
Munich
- (when)
-
2010
- Handle
- Last update
-
10.03.2025, 11:44 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Schaltegger, Christoph A.
- Weder, Martin
- Center for Economic Studies and ifo Institute (CESifo)
Time of origin
- 2010
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