Original title: Yield Curve Dynamics and Fiscal Policy Shocks
Authors: Kučera, A. ; Kočenda, Evžen ; Maršál, Aleš
Document type: Research reports
Year: 2022
Language: eng
Series: IES Working Papers, volume: 4/2022
Abstract: We show that government spending does play a role in shaping the yield curve which has important consequences for the cost of private and government financing. We combine government spending shock identification strategies from the fiscal macro literature with recent advancements in no-arbitrage affine term structure modeling, where we account for time-varying macroeconomic trends in inflation and the equilibrium real interest rate. We stress in our empirical macro-finance framework the importance of timing in the response of yields to government spending. We find that the yield curve responds positively but mildly to a surprise in government spending shocks where the rise in risk-neutral yields is compensated by a drop in nominal term premia. The news shock in expectations about future expenditures decreases yields across all maturities. Complementarily, we also analyze the effect of fiscal policy uncertainty where higher fiscal uncertainty lowers yields.
Keywords: Affine Term Structure Model; Fiscal policy; Government Expenditures; U.S. Treasury Yield Curve

Institution: Institute of Information Theory and Automation AS ČR (web)
Document availability information: Fulltext is available at external website.
External URL: http://library.utia.cas.cz/separaty/2022/E/kocenda-0556324.pdf
Original record: http://hdl.handle.net/11104/0330850

Permalink: http://www.nusl.cz/ntk/nusl-508562


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