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The effect of monetary unification on public debt and its real return

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  • Roel Beetsma
  • Koen Vermeylen
Abstract
We explore the implications of monetary unification for real interest rates and (relative) public debt levels. The adoption of a common monetary policy renders the risk-return characteristics of the participating countries more similar, so that the substitutability of their public debt increases after unification. This implies that the average expected real return on the debt increases. Also, the share of the unionwide debt issued by relatively myopic governments or of countries that initially have a relatively dependent central bank increases after unification. This may put the political sustainability of the union under pressure. A transfer scheme that penalizes debt increases beyond the union average is able to undo the interest rate effect of unification, but magnifies the spread in relative debt levels.
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  • Roel Beetsma & Koen Vermeylen, 2007. "The effect of monetary unification on public debt and its real return," Public Choice, Springer, vol. 133(3), pages 393-415, December.
    • Handle: RePEc:kap:pubcho:v:133:y:2007:i:3:p:393-415
    DOI: 10.1007/s11127-007-9196-3
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    Cited by:

    1. repec:spo:wpecon:info:hdl:2441/2302 is not listed on IDEAS
    2. Jerome Creel & Jacques Le Cacheux, 2003. "Inflation divergence and public deficits in a monetary union," Documents de Travail de l'OFCE 2003-05, Observatoire Francais des Conjonctures Economiques (OFCE).
    3. repec:hal:spmain:info:hdl:2441/2302 is not listed on IDEAS
    4. repec:spo:wpmain:info:hdl:2441/2302 is not listed on IDEAS
    5. repec:hal:wpspec:info:hdl:2441/2302 is not listed on IDEAS
    6. Eichler, Stefan, 2012. "Financial crisis risk, ECB “non-standard” measures, and the external value of the euro," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 257-265.

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    More about this item

    Keywords

    Monetary union; (Relative) Public debt; Interest rates; Externalities; Substitutability; Central bank independence; E42; E62; E63; F33;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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