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

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  • L. Marattin
  • S. Salotti

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.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 695.

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Date of creation: Feb 2010
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Handle: RePEc:bol:bodewp:695

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  1. Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government Debt," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1820, Harvard - Institute of Economic Research.
  2. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(2), pages 190-210, May.
  3. Riccardo Faini, 2006. "Fiscal policy and interest rates in Europe," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 21(47), pages 443-489, 07.
  4. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
  5. Favero, Carlo A & Giavazzi, Francesco & Spaventa, Luigi, 1996. "High Yields: The Spread on German Interest Rates," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1330, C.E.P.R. Discussion Papers.
  6. Charles L. Evans & David Marshall, 2001. "Economic determinants of the nominal treasury yield curve," Working Paper Series, Federal Reserve Bank of Chicago WP-01-16, Federal Reserve Bank of Chicago.
  7. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
  8. Hafedh Bouakez & Nooman Rebei, 2007. "Why does private consumption rise after a government spending shock?," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 40(3), pages 954-979, August.
  9. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2003. "Sovereign risk premia in the European government bond market," ZEI Working Papers B 26-2003, ZEI - Center for European Integration Studies, University of Bonn.
  10. Thomas Laubach, 2003. "New evidence on the interest rate effects of budget deficits and debt," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-12, Board of Governors of the Federal Reserve System (U.S.).
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  13. Linnemann, Ludger & Schabert, Andreas, 2004. "Can fiscal spending stimulate private consumption?," Economics Letters, Elsevier, Elsevier, vol. 82(2), pages 173-179, February.
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Cited by:
  1. Gabrisch, Hubert & Orlowski, Lucjan T. & Pusch, Toralf, 2012. "Sovereign default Risk in the Euro-Periphery and the Euro-Candidate Countries," MPRA Paper 41265, University Library of Munich, Germany.
  2. Pusch, Toralf, 2012. "The role of uncertainty in the euro crisis: A reconsideration of liquidity preference theory," Discussion Papers 31, University of Hamburg, Centre for Economic and Sociological Studies (CESS/ZÖSS).
  3. Gerhard Reitschuler & Rupert Sendlhofer, 2011. "Fiscal policy, trigger points and interest rates: Additional evidence from the U.S," Working Papers, Faculty of Economics and Statistics, University of Innsbruck 2011-23, Faculty of Economics and Statistics, University of Innsbruck.
  4. Ageliki Anagnostou & Ioannis Panteladis & Maria Tsiapa, 2012. "Disentangling Different Patterns of Business Cycle Synchronicity in The EU Regions," ERSA conference papers ersa12p924, European Regional Science Association.

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