Template-Type: ReDIF-Paper 1.0
Author-Name: Denis Gorea
Author-X-Name-First: Denis
Author-X-Name-Last: Gorea
Author-Name: Ding Xuan Ng
Author-X-Name-First: Ding Xuan
Author-X-Name-Last: Ng
Author-Name: Fabrizio Zampolli
Author-X-Name-First: Fabrizio
Author-X-Name-Last: Zampolli
Title: Financial and real effects of fiscal risk
Abstract: This paper estimates the macroeconomic and financial effects of fiscal risk shocks using a novel identification from bond yields. We first recover country-specific fiscal risk shocks from a daily Bayesian VAR model in sovereign and safe corporate bond yields, identified via contemporaneous sign restrictions that capture portfolio rebalancing away from government debt toward private safe assets. We then estimate the effects of these shocks using a local-projections framework applied to a monthly panel of twelve economies. Fiscal risk shocks generate stagflationary dynamics. Inflation and inflation expectations rise on impact, while industrial production increases only temporarily before declining persistently. Sovereign yield curves steepen, exchange rates depreciate and equity prices fall. These effects are significantly stronger when monetary policy remains accommodative– leading to persistently negative real interest rates– and when sovereign risk premia are already elevated.
Creation-Date: 2026-06
File-URL: https://www.bis.org/publ/work1364.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1364.htm
File-Format: text/html
Number: 1364
Keywords: fiscal risk, sovereign yields, safe assets, Bayesian VAR, local projections, monetary–fiscal interactions
Classification-JEL: E31, E52, E62, G12, H63
Handle: RePEc:bis:biswps:1364