Yield Curve Dynamics and Fiscal Policy Shocks

Adam Kučera, Evžen Kočenda and Aleš Maršál

No 2022/04, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: We show that government spending does play a role in shaping the yield curve which has important consequences for the cost of private and government financing. We combine government spending shock identification strategies from the fiscal macro literature with recent advancements in no-arbitrage affine term structure modeling, where we account for time-varying macroeconomic trends in inflation and the equilibrium real interest rate. We stress in our empirical macro-finance framework the importance of timing in the response of yields to government spending. We find that the yield curve responds positively but mildly to a surprise in government spending shocks where the rise in risk-neutral yields is compensated by a drop in nominal term premia. The news shock in expectations about future expenditures decreases yields across all maturities. Complementarily, we also analyze the effect of fiscal policy uncertainty where higher fiscal uncertainty lowers yields.

Keywords: Government Expenditures; Fiscal policy; U.S. Treasury Yield Curve; Affine Term Structure Model (search for similar items in EconPapers)
JEL-codes: C38 C51 C58 E43 E47 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2022-04, Revised 2022-04
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Yield Curve Dynamics and Fiscal Policy Shocks (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fau:wpaper:wp2022_04

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