Does fiscal policy affect interest rates? Evidence from a factor-augmented panel

Dell’Erba Salvatore () and Sergio Sola
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Dell’Erba Salvatore: International Monetary Fund, 700 19th Street NW, Washington, DC, 20431, USA

The B.E. Journal of Macroeconomics, 2016, vol. 16, issue 2, 395-437

Abstract: This paper reconsiders the effects of fiscal policy on long-term interest rates employing a factor augmented panel (FAP) to control for the presence of common unobservable factors. We construct a real-time dataset of macroeconomic and fiscal variables for a panel of OECD countries for the period 1989–2013. We find that two global factors – the global monetary and fiscal policy stances – explain more than 60 percent of the variance in the long-term interest rates. Under our frame work, we find that the importance of domestic variables in explaining long-term interest rates is weakened. Moreover, the propagation of global fiscal shocks is larger in economies characterized by macroeconomic and institutional weaknesses.

Keywords: cross-sectional dependence; fiscal policy; heterogeneous panels; interest rates; real time data (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (8)

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Working Paper: Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejmac:v:16:y:2016:i:2:p:395-437:n:9

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DOI: 10.1515/bejm-2015-0119

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