How do governments respond to interest rates?
Autor(a) principal: | |
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Data de Publicação: | 2023 |
Outros Autores: | , |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
Texto Completo: | http://hdl.handle.net/10400.5/27974 |
Resumo: | We explore the optimal and actual responses of fiscal policy to changes in the interest rate on newlyissued public debt (the “marginal interest rate”). We set up a simple theoretical framework with a government aiming to smooth public consumption over time. The distinctive feature is that the government issues debt of different maturities. This introduces a “valuation effect” that has received little attention so far: a rise in the marginal interest rate increases the rate of discounting and, thus, lowers the value of non-maturing debt, which relaxes the budget constraint, thereby inducing a fall in the primary balance. Still, the framework predicts that the total effect of a rise in the marginal interest rate is an increase in the primary balance. Estimates for developed countries suggest that a 1 percentagepoint higher marginal interest rate leads, on average, to roughly a 1 percentage-point higher primary balance. These findings are consistent with governments smoothing the impact of changes in the marginal interest rate and exploiting the valuation effect. Finally, estimates suggest a role for the average (or “effective”) interest rate on outstanding debt. |
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How do governments respond to interest rates?primary balancedebt(marginal and effective) interest ratematurity structuresmoothingvaluation effectWe explore the optimal and actual responses of fiscal policy to changes in the interest rate on newlyissued public debt (the “marginal interest rate”). We set up a simple theoretical framework with a government aiming to smooth public consumption over time. The distinctive feature is that the government issues debt of different maturities. This introduces a “valuation effect” that has received little attention so far: a rise in the marginal interest rate increases the rate of discounting and, thus, lowers the value of non-maturing debt, which relaxes the budget constraint, thereby inducing a fall in the primary balance. Still, the framework predicts that the total effect of a rise in the marginal interest rate is an increase in the primary balance. Estimates for developed countries suggest that a 1 percentagepoint higher marginal interest rate leads, on average, to roughly a 1 percentage-point higher primary balance. These findings are consistent with governments smoothing the impact of changes in the marginal interest rate and exploiting the valuation effect. Finally, estimates suggest a role for the average (or “effective”) interest rate on outstanding debt.ISEG - REM - Research in Economics and MathematicsRepositório da Universidade de LisboaKlaassen, FrancBeetsma, RoelJalles, João Tovar2023-07-04T14:26:49Z2023-072023-07-01T00:00:00Zinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articleapplication/pdfhttp://hdl.handle.net/10400.5/27974engKlaassen, Franc, Roel Beetsma e João Tovar Jalles (2023). "How do governments respond to interest rates?". REM Working paper series, nº 0280/20232184-108Xinfo:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2023-07-09T01:30:28Zoai:www.repository.utl.pt:10400.5/27974Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T18:02:51.848629Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
How do governments respond to interest rates? |
title |
How do governments respond to interest rates? |
spellingShingle |
How do governments respond to interest rates? Klaassen, Franc primary balance debt (marginal and effective) interest rate maturity structure smoothing valuation effect |
title_short |
How do governments respond to interest rates? |
title_full |
How do governments respond to interest rates? |
title_fullStr |
How do governments respond to interest rates? |
title_full_unstemmed |
How do governments respond to interest rates? |
title_sort |
How do governments respond to interest rates? |
author |
Klaassen, Franc |
author_facet |
Klaassen, Franc Beetsma, Roel Jalles, João Tovar |
author_role |
author |
author2 |
Beetsma, Roel Jalles, João Tovar |
author2_role |
author author |
dc.contributor.none.fl_str_mv |
Repositório da Universidade de Lisboa |
dc.contributor.author.fl_str_mv |
Klaassen, Franc Beetsma, Roel Jalles, João Tovar |
dc.subject.por.fl_str_mv |
primary balance debt (marginal and effective) interest rate maturity structure smoothing valuation effect |
topic |
primary balance debt (marginal and effective) interest rate maturity structure smoothing valuation effect |
description |
We explore the optimal and actual responses of fiscal policy to changes in the interest rate on newlyissued public debt (the “marginal interest rate”). We set up a simple theoretical framework with a government aiming to smooth public consumption over time. The distinctive feature is that the government issues debt of different maturities. This introduces a “valuation effect” that has received little attention so far: a rise in the marginal interest rate increases the rate of discounting and, thus, lowers the value of non-maturing debt, which relaxes the budget constraint, thereby inducing a fall in the primary balance. Still, the framework predicts that the total effect of a rise in the marginal interest rate is an increase in the primary balance. Estimates for developed countries suggest that a 1 percentagepoint higher marginal interest rate leads, on average, to roughly a 1 percentage-point higher primary balance. These findings are consistent with governments smoothing the impact of changes in the marginal interest rate and exploiting the valuation effect. Finally, estimates suggest a role for the average (or “effective”) interest rate on outstanding debt. |
publishDate |
2023 |
dc.date.none.fl_str_mv |
2023-07-04T14:26:49Z 2023-07 2023-07-01T00:00:00Z |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10400.5/27974 |
url |
http://hdl.handle.net/10400.5/27974 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
Klaassen, Franc, Roel Beetsma e João Tovar Jalles (2023). "How do governments respond to interest rates?". REM Working paper series, nº 0280/2023 2184-108X |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
application/pdf |
dc.publisher.none.fl_str_mv |
ISEG - REM - Research in Economics and Mathematics |
publisher.none.fl_str_mv |
ISEG - REM - Research in Economics and Mathematics |
dc.source.none.fl_str_mv |
reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
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Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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RCAAP |
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RCAAP |
reponame_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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1799131694170636288 |