Abstract
AbstractThis paper reconsiders the effects of fiscal policy on long-term interest rates employing a factor augmented panel (FAP) to control for the presence of common unobservable factors. We construct a real-time dataset of macroeconomic and fiscal variables for a panel of OECD countries for the period 1989–2013. We find that two global factors – the global monetary and fiscal policy stances – explain more than 60 percent of the variance in the long-term interest rates. Under our frame work, we find that the importance of domestic variables in explaining long-term interest rates is weakened. Moreover, the propagation of global fiscal shocks is larger in economies characterized by macroeconomic and institutional weaknesses.
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