Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel
July 3, 2013
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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.
Subject: Central bank policy rate, Financial services, Fiscal policy, Long term interest rates, Public debt, Short term interest rates
Keywords: aggregate fiscal policy, basis point, Central bank policy rate, Cross-sectional dependence, estimation procedure, FAP estimation method, Fiscal Policy, fiscal policy stance, Global, Heterogeneous panels, inflation rate, Interest rates, Long term interest rates, Real time data, Short term interest rates, time effect, world interest rate, WP
Pages:
44
Volume:
2013
DOI:
Issue:
159
Series:
Working Paper No. 2013/159
Stock No:
WPIEA2013159
ISBN:
9781484394502
ISSN:
1018-5941
