Fiscal Policy and the Term Structure of Interest Rates

Fiscal Policy and the Term Structure of Interest Rates
Author: Qiang Dai
Publisher:
Total Pages: 56
Release: 2005
Genre: Bonds
ISBN:

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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 macro-finance 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 (i) government deficits affect long term interest rates: a one percentage point increase in the deficit to GDP ratio, lasting for 3 years, will eventually increase the 10-year rate by 40--50 basis points; (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 12% of the variance of forecast errors in bond yields.

Fiscal Policy, Public Debt and the Term Structure of Interest Rates

Fiscal Policy, Public Debt and the Term Structure of Interest Rates
Author: Roland Demmel
Publisher: Springer Science & Business Media
Total Pages: 284
Release: 2012-12-06
Genre: Business & Economics
ISBN: 3642585957

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The introduction of the thesis consists of four parts: first, we motivate our chosen macroeconomic setting by looking at some real world phenomena. For a better understanding of these phenomena, we argue that the mutual dynamic interactions between flScal policy and financial markets need to be closely examined in a macroeconomic framework. Second, we review different strands of the economic literature in order to show that most of the literature has so far exclusively concentrated either on fmancial market dynamics or on flScal policy issues. We conclude that a more integrated model setting is called for in order to explain the dynamic interactions observed in reality. Third, we discuss at length the economic assumptions underlying our model. This avoids multiple repetition later on. Finally, we outline the structure of the thesis and the objectives we pursue in the different chapters. 1. 1 Motivation Fiscal policy and financial market reactions are increasingly receiving world wide attention. The most recent examples are the Maastricht criteria about flScal control, the South-East Asia financial crisis and the resulting IMF policy stance, the high level of public debt in developed and developing countries and the effect on interest rates and economic growth. In contrast to the still underdeveloped theoretical literature on these dynamic links, finding empirical evidence that supports the existence of these links is not a very hard task.

Fiscal Policy and Interest Rates in the European Union

Fiscal Policy and Interest Rates in the European Union
Author: Klaas Knot
Publisher: Edward Elgar Publishing
Total Pages: 232
Release: 1996-01-01
Genre: Business & Economics
ISBN: 9781781959657

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This is an extensive study concerned with the potential effects of fiscal policy on financial markets in the EU. It takes into account the gradual liberalization of capital movements through Western Europe & the framework of the European Monetary System.

Fiscal Policy and the Term Structure of Interest Rates in a DSGE Model

Fiscal Policy and the Term Structure of Interest Rates in a DSGE Model
Author:
Publisher:
Total Pages:
Release: 2016
Genre:
ISBN:

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We examine the role of government spending in the dynamics of the term structure of interest rates. Is the quantity of risk related government spending important for the price of risk? How does it depend on monetary policy conduct? Can fiscal policy immunize its impact on the term structure of interest rates? To answer this questions, we explore asset pricing implications of fiscal policy in what become paradigm in dynamic general equilibrium macro-finance literature. We break down the transmission of the government spending to macroeconomic attributes driving the dynamic response of the yield curve, both analytically and numerically. The novelty of our approach lies in the way we quantify the decomposition of pricing kernel. We find that rise in fiscal uncertainty amplifies the hedging property of bonds against real and nominal risks. Depending on the size of uncertainty monetary policy drives up the price of nominal risk. Spending reversals break the link between quantity and price of fiscal risk.

The Term Structure of Interest Rates

The Term Structure of Interest Rates
Author: Jacob B. Michaelsen
Publisher:
Total Pages: 200
Release: 1973
Genre: Business & Economics
ISBN:

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The Term Structure of Interest Rates and the Effects of Macroeconomic Policy

The Term Structure of Interest Rates and the Effects of Macroeconomic Policy
Author: Stephen J. Turnovsky
Publisher:
Total Pages: 20
Release: 1989
Genre: Interest rates
ISBN:

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This paper analyzes the effects of monetary and fiscal policy shocks on the term structure of interest rates. The effects of temporary versus permanent, unanticipated versus anticipated, policy disturbances and the responses of long versus short, and real versus nominal, rates are contrasted. The main results are summarized in a series of propositions. Among them, the finding that an unanticipated permanent fiscal expansion impacts more on long-term rates, may help explain their observed excessive volatility. The effects of structural changes on the relative variances are also discussed, with the effect which operates through the impact on private speculative behavior being emphasized.

The Term Structure of Interest Rates and Monetary Policy During a Zero-Interest-Rate Period

The Term Structure of Interest Rates and Monetary Policy During a Zero-Interest-Rate Period
Author: Jun Nagayasu
Publisher: International Monetary Fund
Total Pages: 44
Release: 2003-10
Genre: Business & Economics
ISBN:

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This paper empirically evaluates the validity of the term structure of interest rates in a low-interest-rate environment. Applying a time-series method to high-frequency Japanese data, the term-structure model is found to be useful for economic analysis only when interest rates are high. When interest rates are low, the usefulness of the model declines, since the interest spread contains little information that can be used for predicting future economic activity. The term-structure relationship is also weakened by the Bank of Japan's use of interest rate smoothing.