Fiscal activism and the cost of debt financing
Article first published online: 2 FEB 2011
Copyright © 2011 John Wiley & Sons, Ltd.
International Journal of Finance & Economics
Volume 17, Issue 1, pages 14–22, January 2012
How to Cite
Dewachter, H. and Toffano, P. (2012), Fiscal activism and the cost of debt financing. Int. J. Fin. Econ., 17: 14–22. doi: 10.1002/ijfe.440
- Issue published online: 29 DEC 2011
- Article first published online: 2 FEB 2011
- Fiscal activism;
- Markov switching and yield curve
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.