Fiscal Policy and Interest Rates: How Sustainable is the 'New Economy'?

34 Pages Posted: 21 Jun 2006

See all articles by David Hauner

David Hauner

International Monetary Fund (IMF) - African Department

Manmohan Kumar

International Monetary Fund (IMF) - Research Department

Date Written: May 2006

Abstract

This paper explores the determinants of long-term government bond yields in the Group of Seven (G-7) economies and analyzes the factors that could explain the conundrum of very low rates in the face of a variety of adverse factors in recent years. In particular, the paper focuses on the deteriorating fiscal position in the G-7 economies and enquires which factors could have offset their impact on long-term interest rates, and how sustainable they are likely to be. A model of interest rate determination is elaborated and estimated for the G-7, with explicit emphasis on capital flows and public savings. The results suggest a high likelihood of a substantial impact of the weaker budgetary positions in the G-7 on global interest rates when the offsetting unprecedented capital flows slow down.

Keywords: Interest rates, fiscal policy, international reserves

JEL Classification: E43, E62

Suggested Citation

Hauner, David and Kumar, Manmohan, Fiscal Policy and Interest Rates: How Sustainable is the 'New Economy'? (May 2006). IMF Working Paper, Vol. , pp. 1-34, 2006. Available at SSRN: https://ssrn.com/abstract=910677

David Hauner (Contact Author)

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

Manmohan Kumar

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7771 (Phone)
202-589-7771 (Fax)

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