Working Paper 2010-04: Reconsidering the link between fiscal policy and interest rates in Australia


This paper examines the empirical relationship between government debt and the real interest margin between Australian and US 10-year government bond yields. Results for the period 1990 to 2009 suggest that Australian general government net debt has no impact on the short-run real interest margin, and has only a small effect in the long run. Further, the estimates suggest that movements in US general government net debt have a considerably larger effect than Australian general government net debt — implying that US influences take greater prominence in explaining the real interest margin.