Fiscal Policy and the Yield Curve in a Small Open Economy

Jesper Lindé

No 220, Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: This paper contains an empirical investigation of the effects of fiscal policy on the yield curve based on a conventional stochastic macro model designed for a small open economy. The empirical investigation undertaken utilizes data for Sweden, a country which has experienced very large fluctuations in the government budget deficits and in the short- and long-term nominal interest rates, thus providing a better empirical test than previous studies. According to the empirical results, larger budget deficits spell higher interest rates, as posited by conventional macroeconomic theory.

Keywords: Term structure of interest rates; Ricardian equivalence; budget deficits; small open economy; stationary and non-stationary time series. (search for similar items in EconPapers)
JEL-codes: E12 E62 F41 (search for similar items in EconPapers)
Date: 1998-01-28, Revised 1998-11-17

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