Following the Great Financial Crisis, large-scale fiscal expansion programs there has been a renewed interest in understanding the economic consequences of fiscal policy interventions: tax and government spending multipliers. These programs were mainly financed through deficits and debt emissions, leading to a sharp increase in the debt stock and as a consequence, concerns about the sustainability of public debt resurfaced.
At the same time, Monetary Policy has responded in an unprecedented fashion: through either conventional or unconventional instruments. This research asks: How does the combination of monetary and fiscal policy affect sovereign yields?
It explores the response of sovereign yields to fiscal policy shocks in South Africa between 1972 and 2019, taking into account Monetary and Fiscal Policy regimes. It identifies regime shifts in policy preferences with Markov-Swichting regressions. Considering either active or passive, monetary and fiscal policy regimes, it compares four combinations of regimes: MAFP, MAFA, MPFP, MPFA and determines the varying impacts on sovereign yield in South Africa.
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