Fiscal Positions and Government Bond Yields in OECD Countries


  • The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. William DeHaven and Robert Sockin provided superb research assistance.


We examine the effect of fiscal positions, both the level of debt and the fiscal balance, on long-term government bond yields in the Organisation for Economic Co-operation and Development (OECD). To control for the endogenity of fiscal positions to the business cycle we utilize forward projections of fiscal positions from the OECD's Economic Outlook. In a panel regression over the period from 1988 to 2007, we find a robust and significant effect of fiscal positions on long-term bond yields. Our estimates imply that the marginal effect of the projected deterioration of fiscal positions adds about 60 basis points to U.S. bond yields by 2015, with effects on other G-7 bond yields generally being smaller.