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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
    as

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    File URL: https://www.nbs.sk/_img/Documents/PUBLIK/WP_2_2019_Marsal_Yield_Curve_Dynamics_EN.pdf
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    References listed on IDEAS

    as
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    4. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, June.
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    7. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2014. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment," American Economic Review, American Economic Association, vol. 104(1), pages 323-337, January.
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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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