The interactions between public debt and government bond yield
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Abstract
This study investigates the interactions between public debt and government bond yield, based on the daily dataset (from 01 April 1993 to 27 May 2022) which contains Debt to the Penny and the 10-year bond of the US economy. We find significant evidence of these interactions, which are best explained under the ADCC-GARCH model with the asymmetric dynamic conditional correlation mechanism. The findings indicate that public debt raise positively influences the yield change, but the yield increase mitigates the state budget, contemporaneously. This result implies that a reasonable usage of public debt facilitates the balance between fiscal and monetary tools. However, policymakers are supposed to consider their operating strategies during financial crises and global volatility, as illustrated by the conditional correlations between return series. We examine the interactions between leading and lagging indicators of an economy, which inspires future research in terms of both methodological framework and scope of the study.
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References
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Albonico, A., Ascari, G., & Gobbi, A. (2021). The public debt multiplier. Journal of Economic Dynamics and Control, 132(C), 1-22. https://doi.org/10.1016/j.jedc.2021.104204
Ampofo, G. M., Jinhua, C., Bosah, P. C., Ayimadu, E. T., & Senadzo, P. (2021). Nexus between total natural resource rents and public debt in resource-rich countries: A panel data analysis. Resources Policy, 74, 102276. https://doi.org/10.1016/j.resourpol.2021.102276
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Bartak, J., Jabłoński, Ł., & Tomkiewicz, J. (2022). Does income inequality explain public debt change in OECD countries? International Review of Economics & Finance, 80, 211-224. https://doi.org/10.1016/j.iref.2022.02.045
Bernardini, M., & Forni, L. (2020). Private and public debt interlinkages in bad times. Journal of International Money and Finance, 109, 102239. https://doi.org/10.1016/j.jimonfin.2020.102239
Bollerslev, T. (1990). Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivariate Generalized ARCH Model. The Review of Economics and Statistics, 72(3), 498-505. https://doi.org/10.2307/2109358
Boly, M., Combes, J. L., Menuet, M., Minea, A., Motel, P. C., & Villieu, P. (2022). Can public debt mitigate environmental debt? Theory and empirical evidence. Energy Economics, 111, 105895. https://doi.org/10.1016/j.eneco.2022.105895
Burkholder, A. A. (1980). New Approaches To The Use Of Lagging Indicators. Business Economics, 15(3), 20–24. http://www.jstor.org/stable/23482533
Bystrov, V., & Mackiewicz, M. (2020). Recurrent explosive public debts and the long-run fiscal sustainability. Journal of Policy Modeling, 42(2), 437-450. https://doi.org/10.1016/j.jpolmod.2019.10.002
Caner, M., Fan, Q., & Grennes, T. (2021). Partners in debt: An endogenous non-linear analysis of the effects of public and private debt on growth. International Review of Economics & Finance, 76, 694-711. https://doi.org/10.1016/j.iref.2021.07.010
Cappiello, L., Engle, R. F., & Sheppard, K. (2006). Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns. Journal of Financial Econometrics, 4(4), 537–572. https://doi.org/10.1093/jjfinec/nbl005
Carrera, J., & de la Vega, P. (2021). The impact of income inequality on public debt. The Journal of Economic Asymmetries, 24, e00216. https://doi.org/10.1016/j.jeca.2021.e00216
Chien, Y., & Wen, Y. (2022). The determination of public debt under both aggregate and idiosyncratic uncertainty. Journal of Economic Theory, 203, 105474. https://doi.org/10.1016/j.jet.2022.105474
De Almeida, D., Hotta, L. K., & Ruiz, E. (2018). MGARCH models: Trade-off between feasibility and flexibility. International Journal of Forecasting, 34(1), 45-63. https://doi.org/10.1016/j.ijforecast.2017.08.003
Dhital, S., Gomis-Porqueras, P., & Haslag, J. H. (2021). Monetary and fiscal policy interactions in a frictional model of fiat money, nominal public debt and banking. European Economic Review, 139, 103861. https://doi.org/10.1016/j.euroecorev.2021.103861
Engle, R. F. (2002). Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models. Journal of Business & Economic Statistics, 20(3), 339-350. https://doi.org/10.1198/073500102288618487
Fotiou, A. (2022). Non-linearities in fiscal policy: The role of debt. European Economic Review, 150, 104212. https://doi.org/10.1016/j.euroecorev.2022.104212
Gómez-Puig, M., Sosvilla-Rivero, S., & Martínez-Zarzoso, I. (2022). On the heterogeneous link between public debt and economic growth. Journal of International Financial Markets, Institutions and Money, 77, 101528. https://doi.org/10.1016/j.intfin.2022.101528
Greiner, A., & Kauermann, G. (2007). Sustainability of US public debt: Estimating smoothing spline regressions. Economic Modelling, 24(2), 350-364. https://doi.org/10.1016/j.econmod.2006.08.004
Guo, S., Pei, Y., & Xie, Z. (2022). A dynamic model of fiscal decentralization and public debt accumulation. Journal of Public Economics, 212, 104692. https://doi.org/10.1016/j.jpubeco.2022.104692
Hause, J. C. (1971). Spectral Analysis and the Detection of Lead-Lag Relations. The American Economic Review, 61(1), 213–217. http://www.jstor.org/stable/1910561
Ling, S., & McAleer, M. (2003). Asymptotic theory for a vector ARMA-GARCH model. Econometric Theory, 19(2), 280-310. https://doi.org/10.1017/S0266466603192092
Marcellino, M. (2006). Leading indicators. Handbook of Manuele, F. A. (2009). Leading & Lagging Indicators: Do they add value to the practice of safety? Professional Safety, 54(12), 28–33. https://www.jstor.org/stable/48687557
Martins, L. F. (2021). The US debt–growth nexus along the business cycle. The North American Journal of Economics and Finance, 58, 101462. https://doi.org/10.1016/j.najef.2021.101462
Mehrotra, N. R., & Sergeyev, D. (2021). Debt sustainability in a low interest rate world. Journal of Monetary Economics, 124, S1-S18. https://doi.org/10.1016/j.jmoneco.2021.09.001
Morlin, G. S. (2022). Growth led by government expenditure and exports: public and external debt stability in a supermultiplier model. Structural Change and Economic Dynamics, 62, 586-598. https://doi.org/10.1016/j.strueco.2022.03.00.
Neftci, S. N. (1979). Lead-lag relations, exogeneity and prediction of economic time series. Econometrica: Journal of the Econometric Society, 47(1), 101-113. https://doi.org/10.2307/1912349
Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica: Journal of the Econometric Society, 59(2), 347-370. https://doi.org/10.2307/2938260
Pintér, G. (2022). The procyclicality of inflation-linked debt. Economics Letters, 218, 110706. https://doi.org/10.1016/j.econlet.2022.110706
Roth, C., Settele, S., & Wohlfart, J. (2022). Beliefs about public debt and the demand for government spending. Journal of Econometrics, 231(1), 165-187. https://doi.org/10.1016/j.jeconom.2020.09.011
Sardoni, C. (2021). The public debt and the Ricardian equivalence: Some critical remarks. Structural Change and Economic Dynamics, 58, 153-160. https://doi.org/10.1016/j.strueco.2021.05.006
Sarno, L. (2001). The behavior of US public debt: a nonlinear perspective. Economics Letters, 74(1), 119-125. https://doi.org/10.1016/S0165-1765(01)00529-8
Zhou, W. X., & Sornette, D. (2007). Lead-lag cross-sectional structure and detection of correlated–anticorrelated regime shifts: Application to the volatilities of inflation and economic growth rates. Physica A: Statistical Mechanics and its Applications, 380, 287-296. https://doi.org/10.1016/j.physa.2007.02.114
Albonico, A., Ascari, G., & Gobbi, A. (2021). The public debt multiplier. Journal of Economic Dynamics and Control, 132(C), 1-22. https://doi.org/10.1016/j.jedc.2021.104204
Ampofo, G. M., Jinhua, C., Bosah, P. C., Ayimadu, E. T., & Senadzo, P. (2021). Nexus between total natural resource rents and public debt in resource-rich countries: A panel data analysis. Resources Policy, 74, 102276. https://doi.org/10.1016/j.resourpol.2021.102276
Badia, M. M., Medas, P., Gupta, P., & Xiang, Y. (2022). Debt is not free. Journal of International Money and Finance, 127, 102654. https://doi.org/10.1016/j.jimonfin.2022.102654
Bartak, J., Jabłoński, Ł., & Tomkiewicz, J. (2022). Does income inequality explain public debt change in OECD countries? International Review of Economics & Finance, 80, 211-224. https://doi.org/10.1016/j.iref.2022.02.045
Bernardini, M., & Forni, L. (2020). Private and public debt interlinkages in bad times. Journal of International Money and Finance, 109, 102239. https://doi.org/10.1016/j.jimonfin.2020.102239
Bollerslev, T. (1990). Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivariate Generalized ARCH Model. The Review of Economics and Statistics, 72(3), 498-505. https://doi.org/10.2307/2109358
Boly, M., Combes, J. L., Menuet, M., Minea, A., Motel, P. C., & Villieu, P. (2022). Can public debt mitigate environmental debt? Theory and empirical evidence. Energy Economics, 111, 105895. https://doi.org/10.1016/j.eneco.2022.105895
Burkholder, A. A. (1980). New Approaches To The Use Of Lagging Indicators. Business Economics, 15(3), 20–24. http://www.jstor.org/stable/23482533
Bystrov, V., & Mackiewicz, M. (2020). Recurrent explosive public debts and the long-run fiscal sustainability. Journal of Policy Modeling, 42(2), 437-450. https://doi.org/10.1016/j.jpolmod.2019.10.002
Caner, M., Fan, Q., & Grennes, T. (2021). Partners in debt: An endogenous non-linear analysis of the effects of public and private debt on growth. International Review of Economics & Finance, 76, 694-711. https://doi.org/10.1016/j.iref.2021.07.010
Cappiello, L., Engle, R. F., & Sheppard, K. (2006). Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns. Journal of Financial Econometrics, 4(4), 537–572. https://doi.org/10.1093/jjfinec/nbl005
Carrera, J., & de la Vega, P. (2021). The impact of income inequality on public debt. The Journal of Economic Asymmetries, 24, e00216. https://doi.org/10.1016/j.jeca.2021.e00216
Chien, Y., & Wen, Y. (2022). The determination of public debt under both aggregate and idiosyncratic uncertainty. Journal of Economic Theory, 203, 105474. https://doi.org/10.1016/j.jet.2022.105474
De Almeida, D., Hotta, L. K., & Ruiz, E. (2018). MGARCH models: Trade-off between feasibility and flexibility. International Journal of Forecasting, 34(1), 45-63. https://doi.org/10.1016/j.ijforecast.2017.08.003
Dhital, S., Gomis-Porqueras, P., & Haslag, J. H. (2021). Monetary and fiscal policy interactions in a frictional model of fiat money, nominal public debt and banking. European Economic Review, 139, 103861. https://doi.org/10.1016/j.euroecorev.2021.103861
Engle, R. F. (2002). Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models. Journal of Business & Economic Statistics, 20(3), 339-350. https://doi.org/10.1198/073500102288618487
Fotiou, A. (2022). Non-linearities in fiscal policy: The role of debt. European Economic Review, 150, 104212. https://doi.org/10.1016/j.euroecorev.2022.104212
Gómez-Puig, M., Sosvilla-Rivero, S., & Martínez-Zarzoso, I. (2022). On the heterogeneous link between public debt and economic growth. Journal of International Financial Markets, Institutions and Money, 77, 101528. https://doi.org/10.1016/j.intfin.2022.101528
Greiner, A., & Kauermann, G. (2007). Sustainability of US public debt: Estimating smoothing spline regressions. Economic Modelling, 24(2), 350-364. https://doi.org/10.1016/j.econmod.2006.08.004
Guo, S., Pei, Y., & Xie, Z. (2022). A dynamic model of fiscal decentralization and public debt accumulation. Journal of Public Economics, 212, 104692. https://doi.org/10.1016/j.jpubeco.2022.104692
Hause, J. C. (1971). Spectral Analysis and the Detection of Lead-Lag Relations. The American Economic Review, 61(1), 213–217. http://www.jstor.org/stable/1910561
Ling, S., & McAleer, M. (2003). Asymptotic theory for a vector ARMA-GARCH model. Econometric Theory, 19(2), 280-310. https://doi.org/10.1017/S0266466603192092
Marcellino, M. (2006). Leading indicators. Handbook of Manuele, F. A. (2009). Leading & Lagging Indicators: Do they add value to the practice of safety? Professional Safety, 54(12), 28–33. https://www.jstor.org/stable/48687557
Martins, L. F. (2021). The US debt–growth nexus along the business cycle. The North American Journal of Economics and Finance, 58, 101462. https://doi.org/10.1016/j.najef.2021.101462
Mehrotra, N. R., & Sergeyev, D. (2021). Debt sustainability in a low interest rate world. Journal of Monetary Economics, 124, S1-S18. https://doi.org/10.1016/j.jmoneco.2021.09.001
Morlin, G. S. (2022). Growth led by government expenditure and exports: public and external debt stability in a supermultiplier model. Structural Change and Economic Dynamics, 62, 586-598. https://doi.org/10.1016/j.strueco.2022.03.00.
Neftci, S. N. (1979). Lead-lag relations, exogeneity and prediction of economic time series. Econometrica: Journal of the Econometric Society, 47(1), 101-113. https://doi.org/10.2307/1912349
Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica: Journal of the Econometric Society, 59(2), 347-370. https://doi.org/10.2307/2938260
Pintér, G. (2022). The procyclicality of inflation-linked debt. Economics Letters, 218, 110706. https://doi.org/10.1016/j.econlet.2022.110706
Roth, C., Settele, S., & Wohlfart, J. (2022). Beliefs about public debt and the demand for government spending. Journal of Econometrics, 231(1), 165-187. https://doi.org/10.1016/j.jeconom.2020.09.011
Sardoni, C. (2021). The public debt and the Ricardian equivalence: Some critical remarks. Structural Change and Economic Dynamics, 58, 153-160. https://doi.org/10.1016/j.strueco.2021.05.006
Sarno, L. (2001). The behavior of US public debt: a nonlinear perspective. Economics Letters, 74(1), 119-125. https://doi.org/10.1016/S0165-1765(01)00529-8
Zhou, W. X., & Sornette, D. (2007). Lead-lag cross-sectional structure and detection of correlated–anticorrelated regime shifts: Application to the volatilities of inflation and economic growth rates. Physica A: Statistical Mechanics and its Applications, 380, 287-296. https://doi.org/10.1016/j.physa.2007.02.114
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