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http://ssrn.com/abstract=936397
 
 

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Fiscal Policy and the Term Structure: Evidence from the Case of Italy in the EMS and the EMU Periods


Carlo A. Favero


Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Stefano Giglio


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

August 2006

CEPR Discussion Paper No. 5793

Abstract:     
We study the relationship between the term structure of interest rates and fiscal policy by considering the Italian case. Empirical analysis has been so far rather inconclusive on this important topic. We abscribe such evidence to three problems: identification, regime-switching and maturity effects. All these aspects are particularly relevant to the Italian case. We propose a parsimonious model with three factors to represent the whole yield curve, and we consider yield differentials between Italian and German Government bonds. To take into account the possibility of regime-switching, we explicitly include a hidden two-state Markov chain that represents market expectations. The model is estimated using Bayesian econometric techniques. We find that government debt and its evolution significantly influence the yield of government bonds, that such effects are maturity dependent and regime-dependent. Hence when investigating the effect of fiscal policy on the term-structure it is of crucial importance to allow for multiple regimes in the estimation.

Number of Pages in PDF File: 41

Keywords: Fiscal policy, term structure, regime-switching, Bayesian estimation

JEL Classification: E0, G0

working papers series


Date posted: October 10, 2006  

Suggested Citation

Favero, Carlo A. and Giglio, Stefano, Fiscal Policy and the Term Structure: Evidence from the Case of Italy in the EMS and the EMU Periods (August 2006). CEPR Discussion Paper No. 5793. Available at SSRN: http://ssrn.com/abstract=936397

Contact Information

Carlo A. Favero (Contact Author)
Bocconi University - Department of Finance ( email )
Via Roentgen 1
Milano, MI 20136
Italy
HOME PAGE: http://www.igier.unibocconi.it\favero
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Stefano Giglio
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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