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Fiscal policy and interest rates: the role of financial and economic integration

Author

Listed:
  • Peter Claeys

    (Faculty of Economics, University of Barcelona)

  • Rosina Moreno

    (Faculty of Economics, University of Barcelona)

  • Jordi Suriñach

    (Faculty of Economics, University of Barcelona)

Abstract

It is commonly believed that a fiscal expansion raises interest rates. However, these crowding out effects of deficits have been found to be small or non-existent. One explanation is that financial integration offsets interest rate differentials on globalised bond markets. This paper measures the degree of integration of government bond markets, using spatial modelling techniques to take this spillover on financial markets into account. Our main finding is that the crowding out effect on domestic interest rates is significant, but is reduced by spillover across borders. This spillover is important in major crises or in periods of coordinated policy actions. This result is generally robust to various measures of cross-country linkages. We find spillover to be much stronger among EU countries.

Suggested Citation

  • Peter Claeys & Rosina Moreno & Jordi Suriñach, 2008. "Fiscal policy and interest rates: the role of financial and economic integration," IREA Working Papers 200810, University of Barcelona, Research Institute of Applied Economics, revised Sep 2008.
    • Handle: RePEc:ira:wpaper:200810
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    3. Germà Bel & Xavier Fageda & Melania Mur, 2011. "Why do municipalities cooperate to provide local public services? An empirical analysis," IREA Working Papers 201118, University of Barcelona, Research Institute of Applied Economics, revised Oct 2011.
    4. Matthias Bauer & Martin Zenker, 2012. "Minor Nuisance Around Foreign Exchange Markets - Lessons from the Stability and Growth Pact Debate," Global Financial Markets Working Paper Series 2012-32, Friedrich-Schiller-University Jena.
    5. Lluís Bermúdez & Antoni Ferri & Montserrat Guillén, 2011. "A correlation sensitivity analysis of non-life underwriting risk in solvency capital requirement estimation," Working Papers XREAP2011-12, Xarxa de Referència en Economia Aplicada (XREAP), revised Sep 2011.
    6. Dell’Erba Salvatore & Sola Sergio, 2016. "Does fiscal policy affect interest rates? Evidence from a factor-augmented panel," The B.E. Journal of Macroeconomics, De Gruyter, vol. 16(2), pages 395-437, June.
    7. Michael Artis & Ernest Miguélez & Rosina Moreno, 2009. "Assessing Agglomeration Economies in a Spatial Framework with Endogenous Regressors," SERC Discussion Papers 0023, Centre for Economic Performance, LSE.
    8. David Castells-Quintana & Vicente Royuela, 2014. "Agglomeration, inequality and economic growth," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 52(2), pages 343-366, March.
    9. Bayraci, Selcuk, 2015. "Return, shock and volatility co-movements between the bond markets of Turkey and developed countries," MPRA Paper 65758, University Library of Munich, Germany.
    10. Peter Claeys & Luis Costa, 2012. "“A Note on the Relationship Between the Cyclicality of Markups and Fiscal Policy”," AQR Working Papers 201208, University of Barcelona, Regional Quantitative Analysis Group, revised Sep 2012.
    11. María Lorena Marí del Cristo & Marta Gómez-Puig, 2013. "“Fiscal sustainability and fiscal shocks in a dollarized and oil-exporting country: Ecuador”," IREA Working Papers 201306, University of Barcelona, Research Institute of Applied Economics, revised Apr 2013.
    12. Juan Luis Jiménez & Jordi Perdiguero & Ancor Suárez, 2011. "Debating as a classroom tool for adapting learning outcomes to the European higher education area," IREA Working Papers 201109, University of Barcelona, Research Institute of Applied Economics, revised Jun 2011.
    13. Miguel Santolino & Catalina Bolancé & Manuela Alcañiz, 2011. "Factors affecting hospital admission and recovery stay duration of in-patient motor victims in Spain," IREA Working Papers 201119, University of Barcelona, Research Institute of Applied Economics, revised Oct 2011.
    14. Masagus M. Ridhwan & Henri L.F. de Groot & Piet Rietveld & Peter Nijkamp, 2012. "Regional Interest Rate Variations: Evidence from the Indonesian Credit Markets," Tinbergen Institute Discussion Papers 12-073/3, Tinbergen Institute.

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    Keywords

    fiscal policy; spillover; interest rates; crowding out; spatial models.;
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