Fiscal Policy and Interest Rates: How Sustainable Is The “New Economy”?

Author/Editor:

Manmohan S. Kumar ; David Hauner

Publication Date:

May 1, 2006

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 explores the determinants of long-term government bond yields in the Group of Seven (G-7) economies and analyzes the factors that could explain the conundrum of very low rates in the face of a variety of adverse factors in recent years. In particular, the paper focuses on the deteriorating fiscal position in the G-7 economies and enquires which factors could have offset their impact on long-term interest rates, and how sustainable they are likely to be. A model of interest rate determination is elaborated and estimated for the G-7, with explicit emphasis on capital flows and public savings. The results suggest a high likelihood of a substantial impact of the weaker budgetary positions in the G-7 on global interest rates when the offsetting unprecedented capital flows slow down.

Series:

Working Paper No. 2006/112

Subject:

Fiscal policy Government debt management Inflation Long term interest rates Real interest rates

English

Publication Date:

May 1, 2006

ISBN/ISSN:

9781451863727/1018-5941

Stock No:

WPIEA2006112

Pages:

34

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