6/2025 Gerda Kirpson, Karsten Staehr. The effects of public debt on public and private interest rates in the euro area
Working Papers of Eesti Pank 6/2025
This study uses data from the euro area to determine the effects of the stock of government debt on the interest rates paid on government debt and on private bank debt. The empirical analysis applies fixed effect instrumental variables on an annual panel running from 1999 to 2024. The results are markedly different for public and private interest rates. An increase in the government debt-to-GDP ratio of 1 percentage point is associated with an increase of around 3 basis points in the yield on public debt, though the effect varies somewhat depending on the sample and the specification. The effect of government debt on the interest rate on new private bank loans is 0.5–2 basis points, but the results are only reasonably robust for housing loans and for loans with longer maturity, while the results for loans to the corporate sector, consumption loans and loans with shorter maturity are less robust.
JEL Codes: H6, H63, E43
Keywords: public debt, public interest rates, private interest rates
DOI: 10.23656/25045520/062025/0224
