OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Recent and Prospective Trends in Real Long-Term Interest Rates

Fiscal Policy and other Drivers

This paper documents some features of recent trends in bond yields and discusses the drivers of these trends. This includes a discussion of the relationship between fiscal balances and interest rates -- with a summary of key empirical results from the literature provided in the Appendix. The main points to emerge from this analysis are as follows. First, cyclical and portfolio-allocation factors seem to have been the main driving forces behind the decline in long-term real interest rates over 2000-2003. However, in some European countries, declining (inflation, exchange-rate, and sovereign) risk premia suggest that the equilibrium real interest rate may now be somewhat lower. Second, the weight of recent evidence suggests a causal relationship from fiscal positions to long-term interest rates, at least for the United States. Thus, the actual and projected deterioration in US fiscal positions might have contributed to the recent rise in bond yields, although part of the ...


Keywords: fiscal policy, international transmission, long-term interest rates
JEL: G20: Financial Economics / Financial Institutions and Services / Financial Institutions and Services: General; F42: International Economics / Macroeconomic Aspects of International Trade and Finance / International Policy Coordination and Transmission; E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy; E43: Macroeconomics and Monetary Economics / Money and Interest Rates / Interest Rates: Determination, Term Structure, and Effects
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