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Fiscal Conditions and Long-term Interest Rates

Author

Listed:
  • Koji Nakamura

    (Associate Director-General and Division Head, Economic Research Division, Research and Statistics Department (currently General Manager of Matsumoto Branch), Bank of Japan (E-mail: kouji.nakamura@boj.or.jp))

  • Tomoyuki Yagi

    (Deputy Director, Research and Statistics Department (currently Deputy Director, Monetary Affairs Department), Bank of Japan (E-mail: tomoyuki.yagi@boj.or.jp))

Abstract

We conduct a quantitative analysis of the effects of fiscal conditions and other factors on nominal long-term interest rates based on panel data of 23 member states of the Organisation for Economic Co- operation and Development (OECD) for the period from 1980 to 2013. In addition to labor productivity, the demographic factor, and inflation rates, our analysis shows that the fiscal balance, national burden ratio, and current account balance (= domestic savings) influence nominal long- term interest rates. The elasticity of nominal long-term interest rates to the fiscal balance vary, depending on the levels of government debt outstanding, which are thought to affect perceptions of fiscal sustainability in the future. This implies that the elasticity of nominal long-term interest rates to the fiscal balance is non-linear depending on the levels of government debt outstanding. We also find that a low national burden ratio nurtures future expectations of fiscal consolidation and thus keeps long-term interest rates at low levels. Furthermore, non-traditional monetary policy measures and the preference for safe assets in recent years are found to keep nominal long-term interest rates at low levels.

Suggested Citation

  • Koji Nakamura & Tomoyuki Yagi, 2017. "Fiscal Conditions and Long-term Interest Rates," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 35, pages 59-88, November.
    • Handle: RePEc:ime:imemes:v:35:y:2017:p:59-88
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    Cited by:

    1. Yutaka Harada, 2021. "Non-traditional monetary policies and their effects on the economy," International Journal of Economic Policy Studies, Springer, vol. 15(1), pages 23-40, February.

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