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Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel
Author: Mr. Salvatore Dell'Erba and Mr. Sergio Sola
Series:
IMF Working Papers
Volume/Issue:
Volume 2013: Issue 159
Language:
English
Publication Date:
03 Jul 2013
DOI:
https://doi.org/10.5089/9781484394502.001
ISBN:
9781484394502
ISSN:
1018-5941
Pages:
44
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
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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 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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund