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

Marattin, Luigi ; Salotti, Simone (2010) The Euro-dividend: public debt and interest rates in the Monetary Union. Bologna: Dipartimento di Scienze economiche DSE, p. 22. DOI 10.6092/unibo/amsacta/4546. In: Quaderni - Working Paper DSE (695). ISSN 2282-6483.
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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.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Marattin, Luigi
Salotti, Simone
Keywords
Panel VAR, Fiscal policy, government bond’s yields
Subjects
ISSN
2282-6483
DOI
Deposit date
04 Feb 2016 11:38
Last modified
04 Feb 2016 11:38
URI

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