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Sovereign currency and long-term interest rates

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  • Hongkil Kim

Abstract

This paper investigates the effects of government debt and deficits on long-term interest rates in 17 advanced economies over the period 1973–2016 from the perspective of currency sovereignty. The empirical findings of this paper suggest the market penalizes non-sovereign nations for the same amount of fiscal deficit with higher interest rates than sovereigns. In addition, non-sovereign countries face accelerating interest rates for an increase in the debt-to-GDP ratio beyond a certain threshold (49% to GDP) while such a pattern is not obvious among sovereign nations. Overall, the results support Modern Monetary Theory (MMT) view that a monetarily sovereign government, as a monopoly issuer of currency, can influence the prices of their liabilities to a significant extent, somewhat independent of existing public debt and market sentiment.

Suggested Citation

  • Hongkil Kim, 2021. "Sovereign currency and long-term interest rates," International Review of Applied Economics, Taylor & Francis Journals, vol. 35(3-4), pages 577-596, July.
    • Handle: RePEc:taf:irapec:v:35:y:2021:i:3-4:p:577-596
    DOI: 10.1080/02692171.2021.1908237
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