Federal Government Debt and Interest Rates

We identify fiscal impulses in the EU New Member States using four different methods and apply econometric panel data techniques to determine what is the response of the output and its components to those impulses. We also directly test the effects of fiscal impulses on labour costs and housholds' expectations. The results confirm that the composition of impulses matters for output and its components' response. Notably, we find evidence that investment and export growth accelerates after fiscal adjustment and decelerates after fiscal stimulus when the impulses are expenditure-based. In turn, private consumption seems not to respond to fiscal impulses regardless of their size. The analysis confirms that expenditure-based fiscal adjustments enhance wage moderation and thereby competitiveness of domestic enterprises, while expenditure-based fiscal stimuli weaken it. By contrast, we do not find evidence that fiscal impulses have an effect on households' confidence.JEL classification: C23, D22, D81, E23, E32, E44, E62

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“…These results are generally consistent with previous works (see, e.g. Engen andHubbard, 2004 or Laubach, 2009). …”

Section: Previous Empirical Studiessupporting

confidence: 94%

Panel Data Evidence on the Effects of Fiscal Impulses in the EU New Member States

2013

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“…It is well within the estimates for the effect of debt on the government's borrowing costs (see Gale and Orszag, 2003, Engen and Hubbard, 2004, or Laubach, 2009). …”

Section: Ecb Working Paper Series No 1308supporting

confidence: 75%

“…The transaction costs imply that an increase of the level of debt to GDP leads to an increase of the interest rate on government bonds. This implication commands broad empirical support (see Gale and Orszag, 2003, Engen and Hubbard, 2004, or Laubach, 2009 Grohé and Uribe (2003), Neumeyer and Perri (2005), and Kumhof and Yakadina (2007), is its analytical tractability. 9 The firms' and financial intermediary's profits π t are redistributed to the household in a lump-sum way.…”

Section: Householdsmentioning

confidence: 87%

Myopic governments and welfare-enhancing debt limits

Rieth

2014

Journal of Economic Dynamics and Control

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“…Yet, this is an important issue for policy making and for academic research. For instance, Evans (1987), Plosser (1987) and Engen and Hubbard (2004) find small or insignificant responses of interest rates, while Laubach (2003) and Gale and Orszag (2003) find significant responses. Evans and Marshall (2002) find different responses of interest rates depending on how they identify fiscal shocks.…”

Section: Introductionmentioning

confidence: 99%

“…We develop a dynamic term structure model to study the impact of fiscal policy 1 Elmendorf and Mankiw (1999), Gale and Orszag (2003) and Engen and Hubbard (2004) provide recent reviews of the literature. See Barro (1987) for an earlier discussion.…”

Section: Introductionmentioning

confidence: 99%

Fiscal Policy and the Term Structure of Interest Rates

Dai¹,

Philippon²

2004

SSRN Journal

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Macroeconomists want to understand the effects of fiscal policy on interest rates, while financial economists look for the factors that drive the dynamics of the yield curve. To shed light on both issues, we present an empirical macrofinance model that combines a no-arbitrage affine term structure model with a set of structural restrictions that allow us to identify fiscal policy shocks, and trace the effects of these shocks on the prices of bonds of different maturities. Compared to a standard VAR, this approach has the advantage of incorporating the information embedded in a large cross-section of bond prices. Moreover, the pricing equations provide new ways to assess the model's ability to capture risk preferences and expectations. Our results suggest that government deficits affect long term interest rates, at least temporarily: (i) a one percentage point increase in the deficit to GDP ratio increases the 10-year rate by 35 basis points after 3 years; (ii) this increase is partly due to higher expected spot rates, and partly due to higher risk premia on long term bonds; and (iii) the fiscal policy shocks account for up to 13% of the variance of forecast errors in bond yields.JEL: E0, G0 * We are grateful to Roberto Perotti for sharing his programs with us.

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Federal Government Debt and Interest Rates

Cited by 210 publications

References 17 publications

Panel Data Evidence on the Effects of Fiscal Impulses in the EU New Member States

Panel Data Evidence on the Effects of Fiscal Impulses in the EU New Member States

Myopic governments and welfare-enhancing debt limits

Fiscal Policy and the Term Structure of Interest Rates

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