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Debt and interest rates: lessons from european monetary union

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  • Riccardo Lo Conte

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    (Università degli Studi di Milano)

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    Abstract

    This paper addresses the relationship between debt and interest rates within the context of the European Monetary Union which, after ten years since its creation, constitutes a convenient framework to test any sensible explanation. My findings highlight that a substantial fraction of European interest rate is accounted for by domestic fiscal fundamentals. Identification of the relative importance of fiscal variables requires joint modelling of international rates to distinguish between the effects of their common dynamics from credit risk implications of worsening fiscal conditions. The estimated model also quantifies liquidity premia.

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    File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I4-P252.pdf
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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 30 (2010)
    Issue (Month): 4 ()
    Pages: 2732-2750

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    Handle: RePEc:ebl:ecbull:eb-10-00112

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    Related research

    Keywords: Debt; interest rates; spreads; VECM; cointegration;

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    1. Gomez-Puig, Marta, 2006. "Size matters for liquidity: Evidence from EMU sovereign yield spreads," Economics Letters, Elsevier, vol. 90(2), pages 156-162, February.
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