This research has two motivations: to explore the relationship between firstly fiscal sustainability and sovereign debt risk, and secondly between government debt and interest rates
Theoretically, debt-financed Fiscal Stimulus programs directly stimulate aggregate demand through government expenditure or tax cuts, but their effectiveness is highly dependent on direct crowding-out of private sector expenditure, spillover effects to the private sector through higher interest rates (risk premium) and the interaction between fiscal policy and monetary policy.
This research asks three questions:
- What is the effect of disaggregated debt-financed revenue and expenditure shocks on interest rates?
- How important are the transmission mechanisms: crowding in/out, risk premium, and fiscal-monetary policy interaction
- What is the effect of interest rate shocks on government debt: monetary policy (domestic and foreign), risk premium, and credit ratings?