Fiscal Conditions and Long-term Interest Rates

November 27, 2015
Koji Nakamura^*
Tomoyuki Yagi ^**

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Abstract

We conduct a quantitative analysis of the effects of fiscal conditions and other factors on nominal long-term interest rates based on panel data of 23 member states of the Organisation for Economic Co-operation and Development (OECD) for the period from 1980 to 2013. In addition to labor productivity, labor input, and inflation rates, our analysis shows that the fiscal balance, national burden ratio, and current account balance (= domestic savings) influence nominal long-term interest rates. The elasticity of nominal long-term interest rates to the fiscal balance vary, depending on the levels of government debt outstanding, which are thought to affect perceptions of fiscal sustainability in the future. This implies that the elasticity of nominal long-term interest rates to the fiscal balance is non-linear depending on the levels of government debt outstanding. We also find that a low national burden ratio nurtures future expectations of fiscal consolidation and thus keeps long-term interest rates at low levels. In addition, non-traditional monetary policy measures in recent years are found to keep nominal long-term interest rates at low levels.

JEL Classifications
E43, E52, H62, H63

Keywords
long-term interest rates, fiscal conditions, monetary policy

The authors would like to thank staff members of the Bank of Japan for their useful comments. The opinions expressed here, as well as any remaining errors, are those of the authors and should not be ascribed to the Bank of Japan.

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