Financial and real effects of fiscal risk

Denis Gorea, Ding Xuan Ng and Fabrizio Zampolli

No 1364, BIS Working Papers from Bank for International Settlements

Abstract: This paper estimates the macroeconomic and financial effects of fiscal risk shocks using a novel identification from bond yields. We first recover country-specific fiscal risk shocks from a daily Bayesian VAR model in sovereign and safe corporate bond yields, identified via contemporaneous sign restrictions that capture portfolio rebalancing away from government debt toward private safe assets. We then estimate the effects of these shocks using a local-projections framework applied to a monthly panel of twelve economies. Fiscal risk shocks generate stagflationary dynamics. Inflation and inflation expectations rise on impact, while industrial production increases only temporarily before declining persistently. Sovereign yield curves steepen, exchange rates depreciate and equity prices fall. These effects are significantly stronger when monetary policy remains accommodative– leading to persistently negative real interest rates– and when sovereign risk premia are already elevated.

Keywords: fiscal risk; sovereign yields; safe assets; Bayesian VAR; local projections; monetary–fiscal interactions (search for similar items in EconPapers)
JEL-codes: E31 E52 E62 G12 H63 (search for similar items in EconPapers)
Date: 2026-06
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