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<p>Given the need of transition economies to fund the investments necessary for development partly through borrowing, this paper investigates empirically the economic consequences of the government cost of borrowing for European transition economies during the period 2003-2016. The investigation analyses the impact of sovereign borrowing costs, in turn, on interest rates on loans to businesses and households, on the growth rates of investment and consumption, and, ultimately, on general economic activity. By utilizing a panel VAR technique our results indicate that consequent upon a positive shock to the cost of sovereign borrowing, the cost of borrowing for loans to both Non-Financial Corporations (NFCs) and households increases. We find that the price transmission from government borrowing costs to the private sector is at play with respect not only to borrowing rates but also to macroeconomic activity at large. Following an increase in sovereign borrowing costs, we observe substantial negative responses in the growth rates of investment, household consumption, and GDP growth. Also, while a price of borrowing increase for NFCs is found to negatively affect investment, household consumption is unaffected by an increase in household borrowing rates. These findings have valuable policy implications for policymakers and stakeholders in transition economies. Specifically, the results suggest that efforts to reduce the cost of sovereign borrowing could have a positive impact on the economy by lowering borrowing costs for households and businesses, promoting investment and consumption, and ultimately boosting economic growth.</p>
</abstract>

Given the need of transition economies to fund the investments necessary for development partly through borrowing, this paper investigates empirically the economic consequences of the government cost of borrowing for European transition economies during the period 2003-2016. The investigation analyses the impact of sovereign borrowing costs, in turn, on interest rates on loans to businesses and households, on the growth rates of investment and consumption, and, ultimately, on general economic activity. By utilizing a panel VAR technique our results indicate that consequent upon a positive shock to the cost of sovereign borrowing, the cost of borrowing for loans to both Non-Financial Corporations (NFCs) and households increases. We find that the price transmission from government borrowing costs to the private sector is at play with respect not only to borrowing rates but also to macroeconomic activity at large. Following an increase in sovereign borrowing costs, we observe substantial negative responses in the growth rates of investment, household consumption, and GDP growth. Also, while a price of borrowing increase for NFCs is found to negatively affect investment, household consumption is unaffected by an increase in household borrowing rates. These findings have valuable policy implications for policymakers and stakeholders in transition economies. Specifically, the results suggest that efforts to reduce the cost of sovereign borrowing could have a positive impact on the economy by lowering borrowing costs for households and businesses, promoting investment and consumption, and ultimately boosting economic growth.

Economic Consequences of the Cost of Government Borrowing in European Transition Economies

South East European Journal of Economics and Business

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Given the need of transition economies to fund the investments necessary for development partly through borrowing, this paper investigates empirically the...

Economic Consequences of the Cost of Government Borrowing in European Transition Economies

Published Online: Jun 09, 2023

Page range: 194 - 210

DOI: https://doi.org/10.2478/jeb-2023-0013

Keywords
Government bonds, risk transmission, lending rates, sovereign debt

© 2023 Berat Havolli, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Economic Consequences of the Cost of Government Borrowing in European Transition Economies

Published Online: Jun 09, 2023

Page range: 194 - 210

DOI: https://doi.org/10.2478/jeb-2023-0013

KeywordsGovernment bonds, risk transmission, lending rates, sovereign debt

© 2023 Berat Havolli, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Keywords
Government bonds, risk transmission, lending rates, sovereign debt