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The Influence of Fiscal and Monetary Policies on the Shape of the Yield Curve

Author

Listed:
  • Yoosoon Chang

    (Indiana University)

  • Fabio Gomez-Rodriguez

    (Lehigh University and Central Bank of Costa Rica)

  • Christian Matthes

    (Indiana University)

Abstract

We investigate the influence of the U.S. government?s spending and taxation decisions, along with the monetary policy choices made by the Federal Reserve, on the dynamics of the nominal yield curve. Aggregate government spending moves the long end of the yield curve, whereas monetary policy and changes in taxation move the short end of the yield curve on impact. Disentangling different types of government spending, we find that only government consumption exerts a discernible influence on the short end of the yield curve. The effects are generally transient and disappear after one year.

Suggested Citation

  • Yoosoon Chang & Fabio Gomez-Rodriguez & Christian Matthes, 2023. "The Influence of Fiscal and Monetary Policies on the Shape of the Yield Curve," CAEPR Working Papers 2023-008 Classification-E, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    • Handle: RePEc:inu:caeprp:2023008
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    More about this item

    Keywords

    Yield Curve; Fiscal Policy; Monetary Policy; Functional Time Series;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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