The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Tuesday, October 19, 2010

The relationship between public debt and interest rates

RBS’s Kieren Davies, who is one of the best local economists going around, has built a neat little empirical model of long-term government bond rates as a function of a range of variables, such as short-term rates, offshore rates, inflation and debt. While I will not disclose the substance of the research here, one finding is worthwhile highlighting. Kieren’s model suggests that for every $10 billion increase in real public debt, long term government bond rates rise by circa 0.07 percentage points. This is not an enormous elasticity. To put it in context, it implies that if government debt were to increase by, say, $50 billion, interest rates would rise by 0.35 percentage points. Fwiw, the chart below shows the time-series change in these two variables since 1990. I believe Treasury has recently published a paper on this subject, but I have not yet got around to reading it...