Working Paper: NBER ID: w2902
Authors: Stephen J. Turnovsky
Abstract: This paper analyzes the effects of monetary and fiscal policy shocks on the term structure of interest rates. The effects of temporary versus permanent, unanticipated versus anticipated, policy disturbances and the responses of long versus short, and real versus nominal, rates are contrasted. The main results are summarized in a series of propositions. Among them, the finding that an unanticipated permanent fiscal expansion impacts more on long-term rates, may help explain their observed excessive volatility. The effects of structural changes on the relative variances are also discussed, with the effect which operates through the impact on private speculative behavior being emphasized.
Keywords: Term structure of interest rates; Monetary policy; Fiscal policy; Interest rate volatility
JEL Codes: E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated permanent fiscal expansion (E62) | long-term interest rates (E43) |
| unanticipated permanent fiscal expansion (E62) | short-term interest rates (E43) |
| government policy changes (O24) | interest rate variances (E43) |
| variance of government policy (H19) | interest rate variances (E43) |
| variance of government policy (H19) | speculative behavior (D84) |
| speculative behavior (D84) | interest rate variances (E43) |
| structural changes in the economy (L16) | relative variances of interest rates (E43) |