Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel
45 Pages Posted: 31 Jul 2013
Date Written: July 2013
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.
Keywords: Fiscal policy, OECD, Interest rates, Monetary policy, Economic models, Cross country analysis, Fiscal Policy, fiscal policy, Real time data, Cross-sectional dependence, Heterogeneous panels, public debt, fiscal stance, budget deficits, fiscal variables, primary deficit, fiscal projections, aggregate fiscal, fiscal expansion, budget deficit, fiscal discipline, fiscal policy variables, fiscal positions, fiscal shocks, fiscal deficits, fiscal vulnerabilities, fiscal retrenchment, account deficits, taxation, primary fiscal deficit, fiscal adjustment, tax policy, fiscal outcome, foreign capital, public expenditures, public deficits, fiscal affairs department, budget law, fiscal sustainability, fi
JEL Classification: C10, E43, E62, F42, F62, H68
Suggested Citation: Suggested Citation