Fiscal Positions and Government Bond Yields in OECD Countries

47 Pages Posted: 28 Feb 2011

See all articles by Joseph W. Gruber

Joseph W. Gruber

Federal Reserve Board - Division of International Finance

Steven B. Kamin

Board of Governors of the Federal Reserve System

Date Written: January 5, 2011

Abstract

We examine the impact of fiscal positions, both the level of debt and the fiscal balance, on long-term government bond yields in the OECD. In order to control for the endogenity of fiscal positions to the business cycle we utilize forward projections of fiscal positions from the OECD's Economic Outlook. In a panel regression over the period from 1988 to 2007, we find a robust and significant effect of fiscal performance on long-term bond yields. Our estimates imply that the marginal effect of the projected deterioration of fiscal positions associated with the recent financial crisis is to add about 60 basis points to U.S. bond yields by 2015, with effects on other G7 bond yields generally being smaller.

Keywords: Fiscal policy, fiscal balances, government debt, interest rates

JEL Classification: E43, E62

Suggested Citation

Gruber, Joseph W. and Kamin, Steven B., Fiscal Positions and Government Bond Yields in OECD Countries (January 5, 2011). FRB International Finance Discussion Paper No. 1011. Available at SSRN: https://ssrn.com/abstract=1769927 or http://dx.doi.org/10.2139/ssrn.1769927

Joseph W. Gruber (Contact Author)

Federal Reserve Board - Division of International Finance ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Steven B. Kamin

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3339 (Phone)
202-736-5638 (Fax)

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