The Price Relevance of Fiscal Developments

Antonio Afonso and Joao Jalles

No 2015/16, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: We use SURE 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; better fiscal stance in expansions induce downward movement in bond yields only after 8 quarters.

Keywords: price level; yields; Ricardian regimes; SURE; local projection; impulse response function (search for similar items in EconPapers)
JEL-codes: E31 E62 H62 O52 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The Price Relevance of Fiscal Developments (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ise:isegwp:wp162015

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