Does fiscal policy affect interest rates?: evidence from a factor-augmented panel
In: IMF working paper 13/159
In: IMF Working Papers
This 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 1989-2012. 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. Compared to the estimates from models which do not account for global factors, we find that the importance of domestic variables in expl