Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel

Author/Editor:

Salvatore Dell'Erba ; Sergio Sola

Publication Date:

July 3, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper reconsiders the effects of fiscal policy on long-term interest rates employing a Factor Augmented Panel (FAP) to control for the presence of common unobservable factors. We construct a real-time dataset of macroeconomic and fiscal variables for a panel of OECD countries for the period 1989-2012. We find that two global factors—the global monetary and fiscal policy stances—explain more than 60 percent of the variance in the long-term interest rates. Compared to the estimates from models which do not account for global factors, we find that the importance of domestic variables in explaining long-term interest rates is weakened. Moreover, the propagation of global fiscal shocks is larger in economies characterized by macroeconomic and institutional weaknesses.

Series:

Working Paper No. 13/159

Subject:

English

Publication Date:

July 3, 2013

ISBN/ISSN:

9781484394502/1018-5941

Stock No:

WPIEA2013159

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

44

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