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Level, Slope, Curvature of Sovereign Yield Curve and Fiscal Behaviour

Listed author(s):
  • António Afonso
  • Manuel M. F. Martins

We study fiscal behaviour and the sovereign yield curve in the U.S. and Germany in the period 1981:I-2009:IV. The latent factors, level, slope and curvature, obtained with the Kalman filter, are used in a VAR with macro and fiscal variables, controlling for financial stress conditions. In the U.S., fiscal shocks have generated (i) an immediate response of the short-end of the yield curve, associated with the monetary policy reaction, lasting between 6 and 8 quarters, and (ii) an immediate response of the longend of the yield curve, lasting 3 years, with an implied elasticity of about 80% for the government debt ratio shock and about 48% for the budget balance shock. In Germany, fiscal shocks entail no significant reactions of the latent factors and no response of the monetary policy interest rate. In particular, while (i) budget balance shocks created no response from the yield curve shape, (ii) surprise increases in the debt ratio caused some increase in the short-end and the long-end of the yield curve in the following 2nd and 3rd quarters.

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File URL: http://pascal.iseg.utl.pt/~depeco/wp/wp232010.pdf
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Paper provided by ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa in its series Working Papers Department of Economics with number 2010/23.

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Date of creation: Nov 2010
Handle: RePEc:ise:isegwp:wp232010
Contact details of provider: Postal:
Department of Economics, ISEG - Lisbon School of Economics and Management, Universidade de Lisboa, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL

Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

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