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Fiscal activism and the cost of debt financing

✍ Scribed by Hans Dewachter; Priscilla Toffano

Publisher
John Wiley and Sons
Year
2011
Tongue
English
Weight
807 KB
Volume
17
Category
Article
ISSN
1076-9307

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✦ Synopsis

ABSTRACT

In 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. Copyright Β© 2011 John Wiley & Sons, Ltd.

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