Fiscal activism and the cost of debt financing
AbstractIn this paper, we estimate the impact of changes in fiscal policy regime on the yield curve. In particular, we differentiate between yield curve responses under active and passive fiscal policy regimes (according to the terminology of Leeper 1991). Analyzing US data in the period 1965-2010, we find a statistically significant impact of fiscal policy only for the active policy regime. A one-percentage-point shock in the primary deficit leads typically to a contemporaneous increase in long-term yields of about 10 basis points, and even stronger cumulative effects. No significant impact of deficits on yields is found in the passive fiscal policy regime.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/267253.
Date of creation: 2010
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Other versions of this item:
- Hans DEWACHTER & Priscilla TOFFANO, 2010. "Fiscal activism and the cost of debt financing," Center for Economic Studies - Discussion papers ces10.13, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Dewachter, Hans & Toffano, Priscilla, 2012. "Fiscal activism and the cost of debt financing," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/353758, Katholieke Universiteit Leuven.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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