Yield Curve Dynamics and Fiscal Policy Shocks

Adam Kuèera, Evžen Koèenda and Aleš Maršál
Authors registered in the RePEc Author Service: Adam Kučera and Evžen Kočenda

No WP 2/2019, Working and Discussion Papers from Research Department, National Bank of Slovakia

Abstract: We use an affine term structure model with time-varying macro trends and a vector autoregression model to investigate the response of the US Treasury yield curve to changes in fiscal policy. By accounting for the timing of the fiscal policy in the shock identification we can separate the effect of news about future increases in government spending from the effect of innovations in changes of current government expenditures. Further, we use the Baker, Bloom, and Davis (2016) uncertainty index dataset to explain the flight to quality type of events. By controlling for the low frequency movement in yields and the decomposition of yield to risk neutral rates and term premia we show that the news channel is driven by a cautious response of agents to an increase in projected future government spending and leads to a drop in yields. This result contrasts with shock into contemporaneous spending which has no significant impact on bond yields.

Keywords: Government Expenditures; Affine Term Structure Model; Time-varying Macro Trends (search for similar items in EconPapers)
JEL-codes: C12 C22 C52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-03
New Economics Papers: this item is included in nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Yield Curve Dynamics and Fiscal Policy Shocks (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1060

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