The Euro-dividend: public debt and interest rates in the Monetary Union

Simone Salotti and Luigi Marattin

No 2010-04, Working Papers - Mathematical Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: The ongoing massive fiscal policy stimulus triggered increasing concerns on the potential impact on interest rate levels, as economic theory predicts. Particularly, the deterioration of some EMU countries’ fiscal positions has been putting at risk Eurozone’ financial stability. In this paper, we estimate a Panel VAR (PVAR) model on the EMU area employing annual data from 1970 to 2008 in order to assess the qualitative and quantitative impact of public debt on interest rates. Our results show that prior to the introduction of the Euro an increase in public debt led to positive and significant effect on long-term nominal interest rates, with a stronger effect for high-debt countries. After the introduction of the single currency, the effect vanishes (in line with Bernoth 2004). We interpret this result as a confirmation of the crucial role of the monetary union in weakening the automatic risk-premium-based channel between debt shocks and returns on government bond.

Keywords: Panel VAR; Fiscal policy; government bond’s yields (search for similar items in EconPapers)
JEL-codes: E62 G12 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2010-02
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.disei.unifi.it/upload/sub/pubblicazioni ... n/dimadwp2010-04.pdf (application/pdf)

Related works:
Working Paper: The Euro-dividend: public debt and interest rates in the Monetary Union (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:flo:wpaper:2010-04

Access Statistics for this paper

More papers in Working Papers - Mathematical Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa Via delle Pandette 9 50127 - Firenze - Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Michele Gori ().