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Yield Curve Dynamics and Fiscal Policy Shocks

Author

Listed:
  • Adam Kuèera
  • Evžen Koèenda
  • Aleš Maršál

    (National Bank of Slovakia)

Abstract

We use an affine term structure model with time-varying macro trends and a vector autoregression model to investigate the response of the US Treasury yield curve to changes in fiscal policy. By accounting for the timing of the fiscal policy in the shock identification we can separate the effect of news about future increases in government spending from the effect of innovations in changes of current government expenditures. Further, we use the Baker, Bloom, and Davis (2016) uncertainty index dataset to explain the flight to quality type of events. By controlling for the low frequency movement in yields and the decomposition of yield to risk neutral rates and term premia we show that the news channel is driven by a cautious response of agents to an increase in projected future government spending and leads to a drop in yields. This result contrasts with shock into contemporaneous spending which has no significant impact on bond yields.

Suggested Citation

  • Adam Kuèera & Evžen Koèenda & Aleš Maršál, 2019. "Yield Curve Dynamics and Fiscal Policy Shocks," Working and Discussion Papers WP 2/2019, Research Department, National Bank of Slovakia.
    • Handle: RePEc:svk:wpaper:1060
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    Cited by:

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    2. Andras Lengyel, 2022. "Treasury Supply Shocks and the Term Structure of Interest Rates in the UK," MNB Working Papers 2022/6, Magyar Nemzeti Bank (Central Bank of Hungary).
    3. Marco Giacoletti & Kristoffer T. Laursen & Kenneth J. Singleton, 2021. "Learning From Disagreement in the U.S. Treasury Bond Market," Journal of Finance, American Finance Association, vol. 76(1), pages 395-441, February.

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    More about this item

    Keywords

    Government Expenditures; Affine Term Structure Model; Time-varying Macro Trends;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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