The Price Relevance of Fiscal Developments

Antonio Afonso and Joao Jalles

International Economic Journal, 2017, vol. 31, issue 1, 36-50

Abstract: We use Seemingly Unrelated Regressions Estimation methods to assess the link between prices, bond yields and the fiscal behavior. A first equation determines the country-specific cost of government financing via the long-term government bond yield, as a function of budget balance positions. A second equation links the price level to the cost of government financing. Our results for 15 EU countries in the period 1980Q1–2013Q4 show that improvements in the fiscal stance lead to persistent falls in sovereign yields; higher sovereign yields are reflected in upward price movements; improvements in the fiscal stance in recession times lead to short-term decreases in yields and better fiscal stance in expansions induce downward movement in bond yields only after 8 quarters.

Date: 2017
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Working Paper: The Price Relevance of Fiscal Developments (2015)
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DOI: 10.1080/10168737.2016.1227348

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