Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel

45 Pages Posted: 31 Jul 2013

See all articles by Salvatore Dell'Erba

Salvatore Dell'Erba

University of Geneva - Graduate Institute of International Studies (HEI)

Sergio Sola

International Monetary Fund (IMF)

Date Written: July 2013

Abstract

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

Dell'Erba, Salvatore and Sola, Sergio, Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel (July 2013). IMF Working Paper No. 13/159, Available at SSRN: https://ssrn.com/abstract=2304103

Salvatore Dell'Erba (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

Avenue de la paix 11A
Geneva, CH-1202
Switzerland

Sergio Sola

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
72
Abstract Views
685
rank
350,344
PlumX Metrics