Debt and interest rates: lessons from european monetary union
AbstractThis 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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Bibliographic InfoArticle provided by AccessEcon in its journal Economics Bulletin.
Volume (Year): 30 (2010)
Issue (Month): 4 ()
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Debt; interest rates; spreads; VECM; cointegration;
Find related papers by JEL classification:
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- G1 - Financial Economics - - General Financial Markets
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- 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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