SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: This paper contains an empirical investigation of the effects of fiscal policy on the yield curve 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 spell higher interest rates, as posited by conventional macroeconomic theory.

Keywords: Term structure of interest rates; Ricardian equivalence; budget deficits; small open economy; stationary and non-stationary time series.

JEL-codes: E12; E62; F41

39 pages, First version: January 28, 1998. Revised: November 17, 1998.

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