Public debts, deficits and interest rates in CEECs: are there spatial spillovers?

ENIn this paper we extend the literature on the relationship between public debts, deficits and government bond yields in the following directions: we examine a set of 11 Central and Eastern European countries during the period 2006–2015; we apply a novel econometric technique that allows for spatial effects; and we test forward-looking instead of current values of explanatory variables thus addressing endogeneity problem. We find that there is overall a highly significant positive effect of both public debt and deficit on long-term interest rates. This effect is found to be larger in CEECs than in developed countries. Moreover, deficits are found to exert a large and significant indirect effect, and these spillovers amount to more than 50% of the overall effect.