What has been the impact of fiscal policy on long-term interest rates in New Zealand?

Abstract

Understanding the impact of fiscal policy on long-term interest rates has important implications for economic policy-makers. This empirical study discovers a strong positive long-run relationship between fiscal policy and long-term interest rates in a New Zealand context. The results are consistent with the ‘conventional view’ of the effects of government debt on interest rates, as they suggest budget deficits ‘crowd out’ interest sensitive components of investment. Over the long run a lower capital stock is likely to impact negatively on New Zealand’s rate of economic growth. Further, in the short run, it suggests fiscal policy may have prevented monetary policy from properly managing interest rates.