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Fiscal Conditions and Long-term Interest Rates

Author

Listed:
  • Koji Nakamura

    (Bank of Japan)

  • Tomoyuki Yagi

    (Bank of Japan)

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, labor input, 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. In addition, non-traditional monetary policy measures in recent years are found to keep nominal long-term interest rates at low levels.

Suggested Citation

  • Koji Nakamura & Tomoyuki Yagi, 2015. "Fiscal Conditions and Long-term Interest Rates," Bank of Japan Working Paper Series 15-E-10, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp15e10
    as

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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2015/data/wp15e10.pdf
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    References listed on IDEAS

    as
    1. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
    2. Ichiue, Hibiki & Shimizu, Yuhei, 2015. "Determinants of long-term yields: A panel data analysis of major countries," Japan and the World Economy, Elsevier, vol. 34, pages 44-55.
    3. Guglielmo Maria Caporale & Geoffrey Williams, 2002. "Long‐term nominal interest rates and domestic fundamentals," Review of Financial Economics, John Wiley & Sons, vol. 11(2), pages 119-130.
    4. Ichiro Fukunaga & Naoya Kato & Junko Koeda, 2015. "Maturity Structure and Supply Factors in Japanese Government Bond Markets," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 33, pages 45-96, November.
    5. Balázs Égert, 2014. "Fiscal policy reaction to the cycle in the OECD: pro- or counter-cyclical?," Mondes en développement, De Boeck Université, vol. 0(3), pages 35-52.
    6. William G. Gale & Peter R. Orszag, 2004. "Budget Deficits, National Saving, and Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 101-210.
    7. Takeo Hoshi & Takatoshi Ito, 2012. "Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?," NBER Working Papers 18287, National Bureau of Economic Research, Inc.
    8. Gros, Daniel, 2011. "External versus Domestic Debt in the Euro Crisis," CEPS Papers 5677, Centre for European Policy Studies.
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    Cited by:

    1. Yugo Koshima, 2019. "Japan's Public Sector Balance Sheet," IMF Working Papers 2019/212, International Monetary Fund.
    2. António Afonso & Frederico Silva Leal, 2017. "Sovereign yield spreads in the EMU: crisis and structural determinants," Working Papers Department of Economics 2017/09, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.

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    More about this item

    Keywords

    long-term interest rates; fiscal conditions; monetary policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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