Fiscal vulnerabilities depend on both the level and composition of government debt. This study investigates this threshold level of debt and its composition to understand the non-linear behavior of the long-term interest rate by developing a novel approach: a panel smooth transition regression with a general logistic model (i.e., a generalized panel smooth transition regression). Our main findings are threefold: (i) the impact of the expected public debt on the interest rate would increase exponentially and significantly as the foreign private holdings ratio exceeds approximately 20 percent; otherwise, strong home bias would mitigate the upward pressure of an increase in public debt on the interest rate; (ii) if the expected public debt-to-GDP ratio exceeds a certain level that depends on the funding source, an increase in foreign private holdings of government debt would cause a rise in long-term interest rates, offsetting the downward effect on long-term interest rates by expanding market liquidity; and (iii) out-of-sample forecast of our novel non-linear model is more accurate than those of previous methods. As such, the composition of government debt plays an important role in the highly non-linear behavior of the long-term interest rate.
内容記述
Publisher's another name: JSPS Grants-in-Aid for Scientific Research (S) Central Bank Communication Design
JEL Codes: E43,E62,H63
Debt Intolerance : Threshold Level and Composition
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