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

July 3, 2013

Preview Citation

Format: Chicago

Salvatore Dell'Erba, and Sergio Sola. Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel, (USA: International Monetary Fund, 2013) accessed December 30, 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 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

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/159
Stock No:

WPIEA2013159
ISBN:

9781484394502
ISSN:

1018-5941

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