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Europe > Norway

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Cover IMF Working Papers
Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel
Mr. Salvatore Dell'Erba
and
Mr. Sergio Sola
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.
Keywords:
WP; basis point; Fiscal Policy; Interest rates; Real time data; Cross-sectional dependence; Heterogeneous panels; world interest rate; fiscal policy stance; aggregate fiscal policy; FAP estimation method; time effect; estimation procedure; inflation rate; Long term interest rates; Central bank policy rate; Short term interest rates; Global