Expected Fiscal Policy And Interest Rates In Open Economy

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Executive Summary

This paper reconsiders the long term effect of fiscal policy on interest rates using a real-time dataset of macroeconomic and fiscal variables in a panel of 17 OECD countries over the period 1989-2009. The authors show that, after controlling for cross sectional dependence using a Factor Augmented Panel, interest rates are mostly related to global factors. Among domestic fiscal variables, the level of expected public debt maintains a positive correlation with interest rates, while among the global factors, the aggregate monetary and fiscal stance play a quantitatively sizeable role. They then analyze how impulses from the aggregate fiscal stance influence each country's interest rates.

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