Public debt and borrowing: Are governments disciplined by financial markets?

Figures & data

Figure 1. Effective interest rate Germany has to pay on its accumulated debt (dark line) and ten years bond yields on the secondary market (light line).

Source: Annual data from Eurostat and own calculations.

Figure 2. Annual debt quotas in the European Union.

Source: Annual data from Eurostat.

Figure 3. Debt quota and interest rate government has to pay on its outstanding debt.

Table 1. Descriptive statistics of the cardinal variables

Variable	Source	Obs.	Mean	Min.	Max.	Std. dev.
Debt quota	Eurostat	386	57.5	6.1	175.1	29.8
Debt quota central state	Eurostat	241	56.9	4.3	181.2	33.9
Primary surplus	Eurostat, own calculations	386	0.0	−27.4	9.8	3.8
Primary surplus central state	Eurostat, own calculations	241	−0.6	−27.0	7.7	3.4
Ten-year government bond yield	Eurostat	386	4.9	1.4	22.5	1.9
Effective interest rate	Eurostat, own calculations	386	4.8	2.1	8.7	1.3
Effective interest rate central state	Eurostat, own calculations	241	4.6	2.0	8.6	1.4
Real growth rate	Eurostat	386	2.2	−17.7	11.3	3.5
Unemployment rate	Eurostat	386	4.1	1.9	27.5	8.5
Real exchange rate (index)	Eurostat	386	102.1	134.9	77.7	7.9
National stock index	Yahoo Finance and Bloomberg	248	7.3	−66.0	117.0	27.4
Consumer prices	Eurostat	248	2.1	−1.7	5.3	1.1

Table 2. Econometric estimation with fixed effects

	Dependent variables
	1. Primary surplus (public Sector)	2. Primary surplus (central state)	3. Primary surplus (public sector)	4. Primary surplus (central state)
Effective interest rate	0.80 (5.46)***	1.11 (5.13)***	1.50 (4.50)***	1.75 (4.85)***
Effective interest rate (Lag 1)			0.19 (0.53)	0.24 (0.64)
Effective interest rate (Lag 2)			−0.56 (−2.01)*	−0.65 (−2.35)*
Real growth rate	0.35 (7.70)***	0.18 (2.99)**	0.33 (6.78)***	0.19 (3.49)***
Unemployment rate	−0.20 (−4.22)***	−0.07 (−1.20)	−0.19 (−3.47)***	−0.08 (1.42)
Real exchange rate	0.06 (3.08)**	0.08 (2.66)**	0.06 (2.22)*	0.10 (3.61)***
Election year	−0.47 (−1.67).	−0.18 (−0.54)	−0.42 (−1,37)	0.01 (0.03)
Stability and growth pact	0.87 (1.97)*	0.00 (0.00)	0.75 (1,43)	0.12 (0.19)
Left government		0.94 (1.58)		0.19 (0.31)
Right government		1.55 (2.63)**		0.70 (1.14)
N	334	241	334	189
R^2	0.42	0.29	0.43	0.39

Notes: Coefficients, t-values (in parentheses) and significance level (‘.’: 10% level, ‘*’: 5% level, ‘**’: 1% level, ‘***’: 0.1% level) are indicated.

Table 3. Model diagnostics

	1. Primary surplus (public sector)	2. Primary surplus (central state)	3. Primary surplus (public sector)	4. Primary surplus (central state)
F-test	F = 9.78	F = 6.74	F = 8.48	F = 5.23
	p = 0.00	p = 0.00	p = 0.00	p = 0.00
Lagrange-Multiplier test (Honda)	Normal = 24.42	Normal = 58.96	Normal = 21.97	Normal = 38.87
	p = 0.00	p = 0.00	p = 0.00	p = 0.00
Hausman test	X^2 = 5.62	X^2 = 13.33	X^2 = 3.15	X^2 = 13.83
	p = 0.47	p = 0.10	p = 0.92	p = 0.18

Figure A1. Annual government bond yields and primary surpluses in the European Union.

Source: Annual data from Eurostat and based on own calculations.

Figure A2. Effective annual interest rates governments have to pay on their outstanding debt and primary surpluses in the European Union.

Source: Annual data from Eurostat and based on own calculations.

Table A1. Econometric estimation (2SLS)

	First stage fitted values bond yields		Second stage primary surplus
National stock index	−1.11 (−3.47)***	Bond yields	0.74 (5.45)***
US bond yields	0.79 (8.98)***	Real grow rate	0.52 (7.91)***
Debt quota	0.03 (3.96)***	Unemployment	−0.53 (−7.41)***
Consumer prices	0.02 (0.23)	Real exchange rate	0.09 (2.32)*
Debt crisis	0.51 (1.63)	Current account balance	0.27 (3.87)***
Fitch investment rating	−7.55 (−11.40)***	Election year	−0.15 (−0.45)
Euro member country	−0.10 (−0.33)	Stability and growth pact	1.24 (3.10)**
N	248		248
R^2	0.52		0.52

Notes: Coefficients, t-values (in parentheses) and significance level (‘.’: 10% level, “*”: 5% level, “**”: 1% level, “***”: 0.1% level) are indicated.

Table A2. Econometric estimation with random effects

	Dependent variables
	1. Primary surplus (public sector)	2. Primary surplus (central state)	3. Primary surplus (public sector)	4. Primary surplus (public sector)
Intercept	−7.69) (−3.45)***	−12.59 (−4.47)***	−7.23 (−2.66)**	−12.05 (−4.48)***
Effective interest rate	0.74 (5.24)***	1.01 (5.11)***	1.46 (4.46)***	1.55 (4.47)***
Effective interest rate (Lag 1)			0.12 (0.33)	0.18 (0.48)
Effective interest rate (Lag 2)			−0.60 (2.13)*	−0.77 (−2.62)**
Real growth rate	0.33 (7.47)***	0.17 (2.98)**	0.31 (6.64)***	0.19 (3.63)***
Unemployment rate	−0.23 (−5.06)***	−0.12 (−2.30)*	−0.22 (−4.38)***	−0.13 (−2.66)**
Real exchange rate	0.05 (2.58)***	0.07 (2.53)*	0.04 (1.61)	0.08 (3.16)**
Election year	−0.47 (−1.67)*	−0.20 (−0.60)	−0.43 (−1.39)	−0.02 (−0.08)
Stability and growth pact	1.16 (2.73)**	0.30 (0.50)	1.11 (2.25)*	0.71 (1.25)
Left government		0.92 (1.59)		0.23 (0.38)
Right government		1.55 (2.70)**		0.72 (1.23)
N	386	241	334	189
R^2	0.44	0.33	0.44	0.43

Notes: Coefficients, t-values (in parentheses) and significance level (‘.’: 10% level, “*”: 5% level, “**”: 1% level, “***”: 0.1% level) are indicated.