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.
Italy’s 2008 Article IV Consultation describes the country's economic developments and policies. Output has been projected to contract by about ½ percent in 2008 and 1 percent in 2009, with risks tilted to the downside, linked to a further slowing of global growth and falling consumer confidence. The economy’s ability to rebound quickly is hampered by rigidities in the product and labor markets, a lack of domestic competition, a likely slower pace of industrial restructuring, and weakness of the public finances.