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Fiscal Policy and Interest Rates: How Sustainable Is The “New Economy”?
Author:
Mr. Manmohan S. Kumar
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and
Mr. David Hauner
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Series:
IMF Working Papers
Volume/Issue:
Volume 2006: Issue 112
Language:
English
Publication Date:
01 May 2006
DOI:
https://doi.org/10.5089/9781451863727.001
ISBN:
9781451863727
ISSN:
1018-5941
Pages:
34
Keywords:
WP; federal funds rate; current account
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund