That Squeezing Feeling: The Interest Burden and Public Debt Stabilization

The paper explores the extent to which the pressure of debt service on other spending items may magnify governments’ concern for debt dynamics, independently of the public debt level itself. Our empirical analysis identifies thresholds of interest bill indicators beyond which governments appear to i...

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Bibliographic Details
Published in:International finance (Oxford, England) England), 2016-06, Vol.19 (2), p.147-178
Main Authors: Debrun, Xavier, Kinda, Tidiane
Format: Article
Language:English
Subjects:
Debt service
Deficit financing
Monetary policy
Studies
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Summary:The paper explores the extent to which the pressure of debt service on other spending items may magnify governments’ concern for debt dynamics, independently of the public debt level itself. Our empirical analysis identifies thresholds of interest bill indicators beyond which governments appear to intensify efforts to curb the debt trajectory. Hence, in the current context of historically high public debts, a country experiencing high and rising borrowing costs and interest payments would be more likely to enact a more aggressive fiscal consolidation than one benefitting from persistently low interest rates – even though both consolidation paths would be consistent with solvency. This could be an important consideration when setting the appropriate pace of normalization of monetary policy.
ISSN:1367-0271
1468-2362
DOI:10.1111/infi.12090