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The effect of real-time fiscal policy on sovereign interest rates in OECD countries

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  • Ernest Dautovic

    (University of Lausanne)

Abstract

The aim of this study is to investigate the effect of real-time projections of fiscal policy stances on government bonds long-term interest rates using a panel of 20 OECD countries between 1992 and 2008. To deal with endogeneity arising from forecasts of fiscal balances the paper exploits instrumental variables and GMM estimators together with the variation in real-time primary balances. The study shows how a static specification that does not include the one-period lag of the interest rate is prone to serial correlation and to downward bias in standard errors. To correct the bias, a dynamic specification with the lagged interest rates used as explanatory variable should be used due to the intrinsic persistent behavior of the interest rates. Results show that when the persistency of the interest rates is taken into account, it corrects the bias in standard errors of the estimates, and the correlation between fiscal policy variables and sovereign rates disappears: the inertia of the behavior of interest rates is the only variable affecting the relation.

Suggested Citation

  • Ernest Dautovic, 2017. "The effect of real-time fiscal policy on sovereign interest rates in OECD countries," International Economics and Economic Policy, Springer, vol. 14(1), pages 167-185, January.
    • Handle: RePEc:kap:iecepo:v:14:y:2017:i:1:d:10.1007_s10368-015-0334-y
    DOI: 10.1007/s10368-015-0334-y
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    Cited by:

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    More about this item

    Keywords

    Real-time fiscal policy; Primary fiscal balance; Government debt; Long-term interest rate; OECD projections; Dynamic panel data;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • G1 - Financial Economics - - General Financial Markets

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