Fiscal Deficits, Public Debt, and Sovereign Bond Yields

By E. Baldacci, Manmohan S. Kumar. Social Science Research Network, 2010

440 citations recorded by the source corpus.

The recent sharp increase in fiscal deficits and government debt in many countries raises questions regarding their impact on long-term sovereign bond yields. While economic theory suggests that this impact is likely to be adverse, empirical results have been less clear cut, have generally ignored nonlinear effects of deficits and debt through some other key determinants of yields, and have been mostly confined to advanced economies. This paper reexamines the impact of fiscal deficits and public debt on long-term interest rates during 1980 - 2008, taking into account a wide range of country-specific factors, for a panel of 31 advanced and emerging market economies. It finds that higher deficits and public debt lead to a significant increase in long-term interest rates, with the precise magnitude dependent on initial fiscal, institutional and other structural conditions, as well as spillovers from global financial markets. Taking into account these factors 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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/2fab4874db43fde3ff7abdc47c913ffaf0441be7

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Citations in the corpus

Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies (2012, neutral): “7 See Escolano (2010), as well as Section III below.”
Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies (2012, positive): “Finally, Baldacci and Kumar (2010) use a sample of 31 advanced and emerging economies during the pre-crisis period (1980-2008) and introduce debt-to-GDP ratios into the specification in both linear and quadratic fashion.”
Public Debt and Growth (2010, positive): “High debt may adversely affect medium- and long-run growth via several channels: high public debt can adversely affect capital accumulation and growth via higher long-term interest rates (Gale and Orzag, 2003; Baldacci and Kumar, 2010), higher future distortionary taxation (Barro, 1979; Dotsey, 1994”
Feeling the Heat: Climate Risks and the Cost of Sovereign Borrowing (2021, background): “Other work has taken a financial integration perspective, with Baldacci and Kumar (2010) noting that price discovery in government bond markets and the more efficient pricing of sovereign risk are associated with the ongoing integration of government bond markets at the global level.”
The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism? (2013, neutral): “This is consistent with the fact that, in the event of a large shock, citizens and the 1 See Baldacci et al. (2009), Baldacci and Kumar (2010), Hutchison et al. (2010), Furceri and Zdzienicka (2012) for recent work on the effect of fiscal policy in periods of recession.”
Sovereign Risk, Fiscal Policy, and Macroeconomic Stability (2013, background): “…rise 10For a systematic empirical analysis of the relationship between fiscal variables and yields on government bonds, see, among others, Reinhart and Sack (2000), Ardagna et al. (2007), Baldacci et al. (2008), Haugh et al. (2009), Laubach (2009), Baldacci and Kumar (2010), or Borgy et al. (2011).”
Bond Yields in Emerging Economies: It Matters What State You are in (2012, positive): “Baldacci and Kumar (2010) also find that countries with higher initial fiscal deficits and public debt experience larger increases in bond yields when the fiscal position deteriorates.”
Government Debt and Economic Growth (2013, background): “By raising long-term interest rates, higher public debt can crowd out investment (Modigliani, 1961, Gale and Orszag, 2003; Baldacci and Kumar, 2010).”
Government Bonds and Their Investors: What are the Facts and Do They Matter? (2012, neutral): “This set of macro control variables yields results comparable to other studies, such as Baldacci and Kumar (2010). Given the non-stationarity of some variables, the reported results in this study are derived from regressions of quarterly changes of all variables.”
The Pricing of Sovereign Risk and Contagion During the European Sovereign Debt Crisis (2013, background): “In addition, Baldacci and Kumar (2010) make the point that the greater integration of government bond markets globally has enabled a more efficient pricing of sovereign risk and better facilitated price discovery.”