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Fiscal activism and the cost of debt financing
Author(s) -
Dewachter Hans,
Toffano Priscilla
Publication year - 2012
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.440
Subject(s) - economics , fiscal policy , basis point , debt , yield curve , monetary economics , yield (engineering) , shock (circulatory) , macroeconomics , point (geometry) , interest rate , medicine , materials science , geometry , mathematics , metallurgy
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 © 2011 John Wiley & Sons, Ltd.