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Fiscal policy and interest rates in a small open economy

Authors
Publisher
Sveriges Riksbank Stockholm
Publication Date
Keywords
  • E12
  • E62
  • F41
  • Ddc:330
  • Term Structure Of Interest Rates
  • Ricardian Equivalence
  • Budget Deficits
  • Small Open Economy
  • Stationary And Non-Stationary Time Series
Disciplines
  • Design
  • Economics
  • Mathematics
  • Political Science

Abstract

This paper contains an empirical investigation of the effects of fiscal policy on interest rates based on a conventional stochastic macro model designed for a small open economy. The empirical investigation undertaken utilizes data for Sweden, a country which has experienced very large fluctuations in the government budget deficits and in the short- and long-term nominal interest rates, thus providing a better empirical test than previous studies. According to the empirical results, larger budget deficits jspell higher interest rates, as posited by conventional macroeconomic theory.

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