Do fiscal shocks explain bond yield in high and low debt economies

Abstract

The goal of this paper is to explore determinants of short-, medium- and long-run bond yields through time series data analysis for 11 developed countries, with five of them being high-debt and remaining as the low-debt economies. By applying variance decomposition using structural vector autoregression (SVAR) model, empirical findings confirm an important role of demand and supply factors that drive the interest rates across their frequency spectrum. Our results also highlight that for interest rates of different maturities, these factors exhibit heterogeneous behavior across high- and low-debt countries during the pre- and post-crisis regimes.