Fiscal Activism and the Cost of Debt Financing

19 Pages Posted: 20 May 2010

See all articles by Hans Dewachter

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics; Erasmus Research Institute of Management (ERIM)

Priscilla Toffano

KU Leuven

Date Written: April 2010

Abstract

In this paper, we estimate the impact of changes in fiscal policy regime on the yield curve. In particular, we differentiate between yield curve responses under active and passive fiscal policy regimes (according to the terminology of Leeper 1991). Analyzing US data in the period 1965-2010, we find a statistically significant impact of fiscal policy only for the active policy regime. A one-percentage-point shock in the primary deficit leads typically to a contemporaneous increase in long-term yields of about 10 basis points, and even stronger cumulative effects. No significant impact of deficits on yields is found in the passive fiscal policy regime.

Keywords: Fiscal activism, Markov switching and yield curve

JEL Classification: G12, E62

Suggested Citation

Dewachter, Hans and Toffano, Priscilla, Fiscal Activism and the Cost of Debt Financing (April 2010). Available at SSRN: https://ssrn.com/abstract=1612208 or http://dx.doi.org/10.2139/ssrn.1612208

Hans Dewachter (Contact Author)

Catholic University of Leuven (KUL) - Department of Economics ( email )

Center for Economic Studies
Naamsestraat 69
Leuven, B-3000
Belgium
+0032 16 326859 (Phone)
+0032 16 326796 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Priscilla Toffano

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

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