The Interest-Rate Sensitivity of the Demand for Sovereign Debt. Evidence from OECD Countries (1995-2011)

40 Pages Posted: 19 Feb 2015

See all articles by Giuseppe Grande

Giuseppe Grande

Bank of Italy

Sergio Masciantonio

European Union - European Commission

Andrea Tiseno

Bank of Italy

Date Written: October 23, 2014

Abstract

Public debt levels in advanced economies have increased dramatically over recent years and they could put considerable upward pressure on market yields. Using a novel identification approach based on financial accounts and focusing on panel regressions for 18 advanced economies over the period 1995-2011, this paper estimates the long-term slope of the demand function for government securities in a reduced-form setting. We find that public debt does matter: each percentage point increase in the public debt to GDP ratio raises 10-year rates by about 2 basis points. The potential drag on public debt sustainability caused by the feedback loop of public debt on higher interest rates should not therefore be overlooked.

Keywords: government debt, long-term interest rates, financial accounts

JEL Classification: E43, G12, H63

Suggested Citation

Grande, Giuseppe and Masciantonio, Sergio and Tiseno, Andrea, The Interest-Rate Sensitivity of the Demand for Sovereign Debt. Evidence from OECD Countries (1995-2011) (October 23, 2014). Bank of Italy Temi di Discussione (Working Paper) No. 988, Available at SSRN: https://ssrn.com/abstract=2566744 or http://dx.doi.org/10.2139/ssrn.2566744

Giuseppe Grande (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+390647922643 (Phone)
+390647923723 (Fax)

Sergio Masciantonio

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Andrea Tiseno

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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