Are Fiscal and Monetary Policies Reflected in Real Yields? Evidence from a Period of Disinflation and Declining Deficit Targets

Ber, Brender and Ribon study the effects of fiscal and monetary policy on real bond yields with reference to the Israeli experience during the 1990s. They find that both monetary and fiscal policy affect real yields. On the one hand, fiscal policy has a direct impact on the money market via the expected deficit and an indirect one via inflation expectations. The former mechanism is relevant only when the effects of the cycle are accounted for and it is larger on long-term than on short-term yields. On the other hand, monetary policy has a marked direct impact on short-term yields, but also on long-term ones, the latter effect being attributed to the disinflationary policy implemented in Israel during the 1990s. The authors also find that the formal deficit targets, adopted by the government since the early 1990s, had a distinguishable effect on the yields, beyond that of the expected cyclically adjusted deficit