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Debt and interest rates: lessons from european monetary union

Author

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  • Riccardo Lo Conte

    (Università degli Studi di Milano)

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.

Suggested Citation

  • Riccardo Lo Conte, 2010. "Debt and interest rates: lessons from european monetary union," Economics Bulletin, AccessEcon, vol. 30(4), pages 2732-2750.
    • Handle: RePEc:ebl:ecbull:eb-10-00112
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    File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I4-P252.pdf
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    References listed on IDEAS

    as
    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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    More about this item

    Keywords

    Debt; interest rates; spreads; VECM; cointegration;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G1 - Financial Economics - - General Financial Markets

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