Budget deficits and interest rates in Germany

This study uses the basic tools of cointegration to determine whether there exists a long-term relationship between budget deficits and nominal interest rates in Germany. Maximum eigenvalue, trace, and likelihood ratio tests all affirm that there does apparently exist a long-term relationship between the budget deficit and the nominal interest rate. Accordingly, regression studies and formal causality tests have a reasonable basis for investigating whether budget deficits lead to higher interest rates in Germany.     

What keeps long-term U.S. interest rates so low?

U.S. government indebtedness and fiscal deficits increased notably following the Global Financial Crisis. Yet long-term interest rates and U.S. Treasury yields have remained remarkably low. What keeps long-term interest rates so low? This paper relies on a simple model, based on John Maynard Keynes’ view that the central bank's actions are the key drivers of long-term interest rates, to explain the behavior of long-term interest rates in the U.S. The empirical findings confirm that short-term interest rates are the most important determinants of long-term interest rates in the U.S. Contrary to conventional wisdom, higher government indebtedness has a negative effect on long-term interest rates, particularly on a long run basis. However, in the short run, higher government indebtedness has a positive effect on long-term interest rates. These are relevant for contemporary policy debates and macroeconomic theory.     

How is the Debt Managed? Learning from Fiscal Stabilizations

This paper examines public debt management during episodes of fiscal stabilization when long–term interest rates are generally higher than governments' expectations of future rates. We find that governments increase the share of fixed–rate long–term debt denominated in the domestic currency, the higher is the conditional volatility of short–term interest rates, the lower are long–term interest rates, and the stronger is the fall in long–term rates that follows the announcement of the stabilization program. This evidence suggests that governments tend to prefer long to short maturity debt because they are concerned about refinancing risk. However, when long–term rates are high relative to their expectations, they issue short maturity debt to minimize borrowing costs.
JEL classification : E 63; H 63     

Linkages between property asset returns and interest rates: evidence for the UK

This paper considers the effect of short- and long-term interest rates, and interest rate spreads upon real estate index returns in the UK. Using Johansen's vector autoregressive framework, it is found that the real estate index cointegrates with the term spread, but not with the short or long rates themselves. Granger causality tests indicate that movements in short term interest rates and the spread cause movements in the returns series. However, decomposition of the forecast error variances from VAR models indicate that changes in these variables can only explain a small proportion of the overall variability of the returns, and that the effect has fully worked through after two months. The results suggest that these financial variables could potentially be used as leading indicators for real estate markets, with corresponding implications for return predictability.     

Economy as Instituted Process: Change,Transformation, and Progress

During the past two decades, chronic fiscal deficits have led to elevated and rising ratios of government debt to nominal GDP in Japan. Nevertheless, long-term Japanese government bonds' (JGBs) nominal yields initially declined, and have since stayed remarkably low and stable. This is contrary to the received wisdom which holds that higher government deficits and indebtedness will exert upward pressures on nominal yields. This paper examines the relationship between JGBs' nominal yields and short-term interest rates, as well as other factors, such as low inflation, persistent deflationary pressures, and tepid growth. We also argue that Japan has monetary sovereignty, which gives the Japanese government the ability to service its debt, and enables the Bank of Japan (BOJ) to keep JGBs' nominal yields low by ensuring that short-term interest rates are low, and by using various other tools of monetary policy. The argument that short-term interest rates and monetary policy are the primarily drivers of long-term interest rates follows John Maynard Keynes's (1930) insights.     

Fiscal adjustment and the costs of public debt service: evidence from OECD countries

We use a panel of 21 OECD countries from 1970 to 2009 to investigate the effects of different fiscal adjustment strategies on long-term interest rates – a key fiscal indicator reflecting the costs of government debt service. As Europe’s sovereign debt crisis has shown, governments confronted with high deficits and rising debt may be forced to enact fiscal adjustments in order to avoid increasing market pressure and solvency problems. Over the last four decades, such measures taken by governments in OECD countries have varied in duration, size, composition and in their success to re-establish fiscal sustainability. We find that large and expenditure-based adjustments lead to substantially lower long-term interest rates. Small and revenue-based measures do not have an effect on interest rates. Financial markets thus only seem to value strict and decisive measures – a clear sign that the government’s pledge to cut the deficit is credible.     

A Keynesian explanation of Indian government bond yields

Abstract

John Maynard Keynes held that the central bank’s actions mainly determine long-term interest rates through short-term interest rates and various monetary policy measures. His conjectures about the determinants of long-term interest rates were made in the context of advanced capitalist economies and were based on his views on liquidity preference, ontological uncertainty, and the formation of investors’ expectations. Is Keynes’s conjecture that the central bank’s action is the main driver of long-term interest rates valid in emerging markets, such as India? This paper empirically investigates the determinants of changes in Indian government bonds’ nominal yields. Changes in short-term interest rates, after controlling for other crucial variables, such as changes in the rate of inflation and the rate of economic activity, take a lead role in driving the changes of the nominal yields of Indian government bonds. This suggests that Keynes’s views on long-term interest rates can also be applicable to emerging markets. The empirical findings reveal that higher fiscal deficits do not appear to exert upward pressures on government bond yields in India.     

Term structure and forward guidance as instruments of monetary policy

This paper studies a simple monetary model with a Ricardian fiscal policy in which equilibria are indeterminate if monetary policy consists solely of a rule for fixing the short-term interest rate. We introduce explicitly into the model the agents’ expectations of inflation which create the indeterminacy and show that there are two types of policies—a term structure rule or a forward guidance rule for the short rate—which lead to determinacy. The first consists in fixing the interest rates on a family of bonds of different maturities as function of realized inflation; the second consists in fixing the short-term interest rate and the expected values of the short-term interest rate for a sequence of periods into the future as a function of realized inflation. If the monetary authority chooses an inflation process that satisfies conditions derived in the paper and applies one of these rules, it anchors agents’ expectations to this process, in the sense that it is the unique inflation process compatible with equilibrium when the interest rates or expected future values of the short rate are those specified by the term structure or forward guidance rule.     

A new test for fiscal sustainability with endogenous sovereign bond yields: Evidence for EU economies

In this paper we develop a new test for fiscal sustainability and propose a synthetic fiscal sustainability indicator. Conventional tests based on fiscal reaction functions assume a constant real interest rate. However, many empirical studies find evidence on a positive response of long-term rates to sovereign debt levels. We take this evidence into account and endogenize the long-term real interest rate in testing fiscal sustainability. We apply the new test for the European economies. We find that considering the response of interest rate to debt may change the assessment of fiscal sustainability. More specifically, our results indicate that fiscal sustainability is at risk in a number of European Union economies, even if the results of traditional approaches suggest sustainable fiscal policy.     

The Impact of Fiscal and Other Economic Freedoms on Economic Growth: An Empirical Analysis

This empirical study investigates the impacts on economic growth of reduced fiscal freedom from both the taxing and spending sides. After controlling for nominal long term interest rates, net exports, federal government budget deficits, and other factors, panel two stage least squares estimations using a 4-year panel data set for the OECD nations as a group reveals that reduced fiscal freedom leads to a reduced rate of economic growth; furthermore, it is found that reduced freedom from excessive government size also leads to a reduced rate of economic growth.     

Have budget deficits and money growth caused changes in interest rates and exchange rates in Canada?

This paper examines empirically the causal impact of monetary and fiscal policy on exchange rates and interest rates in Canada using a six-by-six vector autoregressive (VAR) model with variable lag structure. The results suggest that changes in the base money and budget deficits have no direct causal effects on exchange rates, a finding consistent with the monetary explanation that exchange rates follow a random walk. Also consistent with the Ricardian equivalence hypothesis, the results reveal no direct effect of budget deficits on interest rates, casting doubts on the crowding-out phenomenon for Canada. In contrast, changes in the base money unidirectionally cause changes in interest rates, implying some support for using interest rates as a key intermediate policy target for the Canadian monetary authorities.     

Stochastic and structural fiscal policy in a monetary stationary economy

In the framework of a monetary asset pricing model which is simple enough to generate closed form formulae for equilibrium price functions the interactions between output, fiscal policy, and asset markets is investigated. With money yielding liquidity services in the exchange process real stock prices are negatively correlated with anticipated (stochastic) fiscal policy changes, while the impact of unanticipated (structural) fiscal policy on the stock market depends qualitatively on the ‘business cycle’ of the economy. It is shown that the monetary character of the economy, more precisely the role of money in the exchange process, is critical for the relationship between fiscal policy and real share prices. Moreover, while contingent fiscal policy measures may be successful in stabilizing the real interest rate on money they are incapable of achieving a stable term structure of the real rate on stocks. In contrast, uncontingently higher public expenditures generally promote the volatility of the real rates on financial assets.     

Investigating the US consumer credit determinants using linear and non-linear cointegration techniques

This paper has investigated the determinants of total consumer credit for the USA over the period 1968:Q1 to 2011:Q3. Using Breitung's (2001) non-parametric rank tests, we find the existence of linear cointegrating relationships in the consumer credit models. Enders and Siklos' (2001) threshold adjustment tests revealed that non-linearity is present slightly (with a statistical significance of 10% level) in the consumer credit model with a short-term interest rate (federal funds rate), while there exists a linear and symmetric cointegrating relationship in the models with medium (3 years) and long (10 years) term interest rates. Application of the linear cointegrating techniques (fully modified OLS, canonical cointegrating regression and general to specific) show that consumer credit responds more significantly to the medium and long-term interest rates than the short-term interest rate. We use these results to assess the popular belief that abnormality in the consumer credit set the stage for the 2007–08 crisis and severe recession.     

中国地方政府债务可持续、财政空间与经济增长*

根据Ghosh et al（2013）财政空间理论，利用2010—2019中国省级面板数据，对中国省级政府债务可持续、财政空间和经济增长之间的关系及其机制进行了研究。结果表明，中国个别省份出现了财政疲劳现象，要把控好债务风险雷区，但各地区债务限额存在异质性，在不损害可持续性的情况下，大部分地方政府有足够的“回旋余地”实施财政刺激政策。我国省级政府的财政空间和经济增长之间存在倒“U”型关系，即当政府负债率高于财政空间的临界点（或较低的财政空间）时开始阻碍经济增长，因此，需要通过降低政府负债率实现更高的增长。进一步研究发现，政府债务影响经济增长最重要的渠道是公共投资和私人投资，全要素生产率、储蓄和长期真实利率也是政府债务影响经济增长的重要渠道，而长期名义利率未能成为政府债务影响经济增长的渠道。     

HETEROGENEITY AND REDISTRIBUTION: BY MONETARY OR FISCAL MEANS?*

In models with heterogeneous agents, issues of distribution and redistribution jump to the fore, raising the question: Which policies—monetary or fiscal—work most effectively in transferring income between groups? From Townsend's turnpike model, two basic results emerge to help answer this question. First, the zero lower bound on nominal interest rates often appears as an obstacle to redistribution by monetary means. Second, assumptions about the government's ability to raise tax revenue without distortion and to discriminate between agents in distributing that tax revenue play a large role in determining whether agents prefer to redistribute income by fiscal means instead.     

“Do Fiscal Deficits Influence Current Accounts? A Case Study of India”

This paper examines the effects of fiscal deficits on the current account deficits in the Indian economy. In many developing countries, fiscal deficits are mostly financed through monetization, causing crowding out of private investment expenditures. However, fiscal deficits in India are mostly financed through official borrowings from various external sources, leading to higher interest payments and outgoings on the external account. Such a policy could eventually precipitate balance of payments crises despite favorable trade account and real exchange rate. Data over three decades for the Indian economy show that, in addition to the real exchange rate and the ratio of private investment to GDP, fiscal deficits significantly contribute to the current account deficits.     

The role of fiscal policy in the St. Louis model: Nonparametric estimates for a small open economy

This paper reevaluates the efficacy of monetary and fiscal policies and bidirectional causality between income and each of the policy instruments used in the St. Louis model for aggregate demand using nonparametric (or infinite parametric) spectral methods. We proceed by estimating the strength of the correlations (or partial coherences) between income and each of the policy instruments over various frequencies. Then we obtain the corresponding band regression and Hannan's efficient estimates of both the lead and lag coefficients in the St. Louis model. The analysis is carried out with seasonally adjusted quarterly data and is divided into the flexible, fixed, and managed flexible exchange rate regimes. We find that while estimates from parametric regressions yield the standard conclusions for the St. Louis model, results from the nonparametric analysis are quite different. Specifically, the results of our analysis reveal that (i) both monetary and fiscal instruments are strongly correlated with income over cycles of 10 quarters or longer for the most recent period of the managed flexible exchange rate regime, and (ii) bidirectional causality exists between income and the fiscal policy instrument. These results suggest that both monetary and fiscal policy have a long-lasting effect on aggregate demand and that bidirectional causality exists between income and policy instruments. An explanation for the existence of bidirectional causality might be that the Canadian government generally pursued a purposeful discretionary fiscal policy during the post-World War II period. Furthermore, it appears that discretionary policy action may have been anticipated by rational, farsighted, and forward-looking economic agents. Finally, our results for the flexible exchange rate and fixed rate regimes are in agreement with the Mundell-Fleming view of the role of monetary fiscal policy in an open economy.     

我国货币—产出非对称影响关系的实证研究

货币与产出之间的非对称影响关系研究,近年来在宏观经济学领域受到了广泛的关注。本文运用平滑迁移向量误差修正(STVECM)模型,对1989—2007年我国货币与产出之间是否存在非对称影响关系展开实证分析。引入年产出增长率、年货币增长率以及年通货膨胀率的年度变化作为转移变量,线性检验表明我国货币、产出和价格系统存在显著的非线性;通过模型估计识别了我国货币—产出关系的经济和/或政策状态相依性;运用非线性Granger因果关系检验进一步证明了两者之间是一种非对称关系。概括来说,我国货币对产出的影响关系具有明显的非对称性,其依赖于经济周期的高速增长和低速增长阶段、货币供给的高速增长和低速增长阶段以及通货膨胀率的加速和减速阶段。     

Core Concepts of Institutionalist Public Finance: Problem Solving,Institutional Analysis,Strategic Choice,and Stakeholder Engagement

Citizens and policymakers in many nations are becoming increasingly concerned about large budget deficits and mounting long-term fiscal policy challenges. At the same time, slow economic growth in the United States and Europe is causing some people to demand more government spending (and lower taxes) and others to question the efficacy of fiscal policy. Against that backdrop, institutional economists are exhibiting renewed interest in the field of public finance. This article responds by outlining four core concepts of institutionalist public finance: problem solving, institutional analysis, strategic choice, and stakeholder engagement. What distinguishes the perspective of institutionalism from that of neoclassical economics, today’s dominant economic paradigm, is described in the course of the discussion. The core concepts of institutionalist public finance offer a coherent approach to the study of fiscal policy questions. Those concepts were first fashioned decades ago, but remain relevant: institutionalism continues to provide a solid basis for constructive analyses of fiscal challenges.     

THE CAUSALITY BETWEEN STOCK RETURNS AND EXCHANGE RATES: REVISITED

There has been a renewed interest in the determination of causality between stock markets and exchange rates. In nearly all these studies Granger causality tests has been extensively used. In this paper, we employ the standard Granger causality methodology to a research setting similar to that of Granger et al. (2000). We consider the causality between the two markets in nine east Asian economies. We find that the direction of causality tends to demonstrate a hit-and-run behaviour and switches according to the length of period chosen. This implies that great caution should be taken when interpreting Granger causality results.