SUSTAINING GOVERNMENT BUDGET DEFICITS AS A CAUSE FOR THE COST OF PUBLIC DEBT SERVICE INCREASE IN WESTERN EUROPEAN COUNTRIES IN THE 1995-2015 PERIOD

Abstract

More and more results of econometric modeling research are showing the relationship between the value of general government deficit and the costs of public debt service. The correlation analysis conducted for the purposes of this work confirms strong negative dependence between the average general government balance (in relation to GDP) and the average yield of 10-year treasury bonds in 15 Western countries within the EU in the 1995–2015 period (sustaining higher deficits of general government are accompanied with higher costs of public debt service over a long period of time). Pearson’s correlation coefficient for the entire research period amounted to –0,78. This dependence increased after the breakout of the financial crisis – within the 2008–2015 period, Pearson’s r = –0,71, whereas during the 1995–2007 period, it was –0,63, which is consistent with the research results pointing out that the condition of public finances affects the decisions of investors in crises greater than in the relatively calm periods.