Yield Curve Dynamics and Fiscal Policy Shocks

Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F62156489%3A43110%2F25%3A43926823" target="_blank" >RIV/62156489:43110/25:43926823 - isvavai.cz</a>
Alternative codes found
RIV/00216208:11230/25:10511036
Result on the web
<a href="https://doi.org/10.1016/j.jedc.2025.105144" target="_blank" >https://doi.org/10.1016/j.jedc.2025.105144</a>
DOI - Digital Object Identifier
<a href="http://dx.doi.org/10.1016/j.jedc.2025.105144" target="_blank" >10.1016/j.jedc.2025.105144</a>

Result language
angličtina
Original language name
Yield Curve Dynamics and Fiscal Policy Shocks
Original language description
This paper examines how anticipated, unanticipated, and uncertainty shocks in U.S. government spending affect the term structure of interest rates, showing that fiscal policy design significantly influences the yield curve and financing costs. Combining a recursively-identified fiscal SVAR with an affine term-structure model that incorporates five-year Congressional Budget Office projections and the Economic Policy Uncertainty index, we recover three orthogonal fiscal shocks and trace their effects on bond markets and economic activity. We find that heightened fiscal policy uncertainty induces a flight to quality, causing immediate declines in Treasury yields. Unanticipated spending shocks have a limited impact on yields, underscoring the forward-looking nature of financial markets. Anticipated spending shocks also lower yields as investors adjust expectations about future macroeconomic conditions. Contrary to traditional views, we observe a contractionary effect on real GDP growth, as lower yields reinforce precautionary behavior among households and firms. Our macro-finance framework captures the bidirectional relationship between macroeconomic expectations and financial markets, highlighting the critical role of the yield curve in transmitting fiscal policy shocks to the real economy.
Czech name
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Czech description
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Type
J<sub>imp</sub> - Article in a specialist periodical, which is included in the Web of Science database
CEP classification
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OECD FORD branch
50206 - Finance

Project
<a href="/en/project/GA22-34451S" target="_blank" >GA22-34451S: New Methods in Pricing Government Debt: Uncertainty and Policy Implications</a><br>
Continuities
P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)

Publication year
2025
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

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