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Fiscal Policy and Interest Rates

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Author Info

  • Manmohan S. Kumar
  • David Hauner

Abstract

This paper explores the determinants of long-term government bond yields in the Group of Seven (G-7) economies and analyzes the factors that could explain the conundrum of very low rates in the face of a variety of adverse factors in recent years. In particular, the paper focuses on the deteriorating fiscal position in the G-7 economies and enquires which factors could have offset their impact on long-term interest rates, and how sustainable they are likely to be. A model of interest rate determination is elaborated and estimated for the G-7, with explicit emphasis on capital flows and public savings. The results suggest a high likelihood of a substantial impact of the weaker budgetary positions in the G-7 on global interest rates when the offsetting unprecedented capital flows slow down.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/112.

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Length: 34
Date of creation: 01 May 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/112

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Related research

Keywords: Interest rates; Oil prices; Capital flows; Foreign exchange reserves; Group of seven; Public sector savings; Economic models; inflation; long-term interest rates; monetary fund; monetary policy; money supply; lead; treasury securities; money demand; reserve currencies; government securities; treasury notes; central bank; monetary aggregates; treasury bonds; money balances;

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References

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Citations

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Cited by:
  1. Manmohan S. Kumar & Emanuele Baldacci, 2010. "Fiscal Deficits, Public Debt, and Sovereign Bond Yields," IMF Working Papers 10/184, International Monetary Fund.
  2. Kiichi Tokuoka, 2010. "The Outlook for Financing Japan's Public Debt," IMF Working Papers 10/19, International Monetary Fund.
  3. Daniele Franco (editor), 2012. "Rules and institutions for sound fiscal policy after the crisis," Workshop and Conferences 11, Bank of Italy, Economic Research and International Relations Area.
  4. Kumar, Manmohan S. & Okimoto, Tatsuyoshi, 2011. "Dynamics of international integration of government securities' markets," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 142-154, January.

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