Fiscal policy and interest rates: the role of financial and economic integration

Peter Claeys, Rosina Moreno () and Jordi Suriñach

No 200810, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

Abstract: It is commonly believed that a fiscal expansion raises interest rates. However, these crowding out effects of deficits have been found to be small or non-existent. One explanation is that financial integration offsets interest rate differentials on globalised bond markets. This paper measures the degree of integration of government bond markets, using spatial modelling techniques to take this spillover on financial markets into account. Our main finding is that the crowding out effect on domestic interest rates is significant, but is reduced by spillover across borders. This spillover is important in major crises or in periods of coordinated policy actions. This result is generally robust to various measures of cross-country linkages. We find spillover to be much stronger among EU countries.

Keywords: fiscal policy; spillover; interest rates; crowding out; spatial models. (search for similar items in EconPapers)
Pages: 29 pages
Date: 2008-09, Revised 2008-09
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (15)

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Chapter: Fiscal Policy and Interest Rates: The Role of Financial and Economic Integration (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ira:wpaper:200810

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