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The Impact of Government Borrowing Costs on Fiscal Discipline
Author(s) -
Tkačevs Oļegs,
Vilerts Kārlis
Publication year - 2019
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/kykl.12207
Subject(s) - economics , government expenditure , monetary economics , fiscal policy , government (linguistics) , monetary policy , interest rate , sample (material) , macroeconomics , panel data , public finance , linguistics , philosophy , chemistry , chromatography , econometrics
Summary This paper studies the impact of government borrowing costs on fiscal discipline against the background of unprecedentedly low interest rates in advanced economies brought about by ultra‐expansionary monetary policies of recent years. Applying the panel data econometric approach for a sample of OECD and 11 early euro area countries over the period 1985–2015, the study suggests a positive and statistically significant impact of government borrowing costs on cyclically adjusted primary balances, indicating that a decrease in borrowing costs leads to a deterioration of fiscal policy stance. The findings herein also suggest that this effect in the euro area seems to be driven by a group of its peripheral rather than core countries and appears to work through the expenditure (more specifically, current expenditure) channel. From the economic policy perspective, these findings imply that monetary policy measures resulting in ultra‐low interest rates may cause negative side effects for fiscal discipline.