Does Fiscal Policy Affect Interest Rates? Evidence From A Factor-Augmented Panel

 
Author/Editor: Salvatore Dell'Erba ; Sergio Sola
 
Publication Date: July 03, 2013
 
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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(s): Fiscal policy | OECD | Interest rates | Monetary policy | Economic models | Cross country analysis

 
English
Publication Date: July 03, 2013
ISBN/ISSN: 9781484394502/2227-8885 Format: Paper
Stock No: WPIEA2013159 Pages: 44
Price:
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