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

May 1, 2006

Preview Citation

Format: Chicago

Manmohan S. Kumar, and David Hauner. Fiscal Policy and Interest Rates: How Sustainable Is The “New Economy”?, (USA: International Monetary Fund, 2006) accessed November 24, 2024

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.

Subject: Fiscal policy, Government debt management, Inflation, Long term interest rates, Real interest rates

Keywords: Current account, Federal funds rate, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/112
Stock No:

WPIEA2006112
ISBN:

9781451863727
ISSN:

1018-5941

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