Fiscal Conditions and Long-term Interest Rates

Koji Nakamura and Tomoyuki Yagi
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Koji Nakamura: Bank of Japan
Tomoyuki Yagi: Bank of Japan

No 15-E-10, Bank of Japan Working Paper Series from Bank of Japan

Abstract: We conduct a quantitative analysis of the effects of fiscal conditions and other factors on nominal long-term interest rates based on panel data of 23 member states of the Organisation for Economic Co-operation and Development (OECD) for the period from 1980 to 2013. In addition to labor productivity, labor input, and inflation rates, our analysis shows that the fiscal balance, national burden ratio, and current account balance (= domestic savings) influence nominal long-term interest rates. The elasticity of nominal long-term interest rates to the fiscal balance vary, depending on the levels of government debt outstanding, which are thought to affect perceptions of fiscal sustainability in the future. This implies that the elasticity of nominal long-term interest rates to the fiscal balance is non-linear depending on the levels of government debt outstanding. We also find that a low national burden ratio nurtures future expectations of fiscal consolidation and thus keeps long-term interest rates at low levels. In addition, non-traditional monetary policy measures in recent years are found to keep nominal long-term interest rates at low levels.

Keywords: long-term interest rates; fiscal conditions; monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E52 H62 H63 (search for similar items in EconPapers)
Date: 2015-11-27
New Economics Papers: this item is included in nep-mac and nep-pbe
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Citations: View citations in EconPapers (2)

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