The Effect of Monetary Unification on Public Debt and its Real Return
Abstract
We explore the implications of monetary unification for real interest rates and (relative) public debt levels. The adoption of a common monetary policy renders the risk-return characteristics of the participating countries more similar, so that the substitutability of their public debt increases after unification. This implies that the average expected real return on this debt increases. Also, the share of the debt issued by relatively short-sighted governments, or by countries that initially have a relatively dependent central bank, increases after unification. A transfer scheme that penalizes debt increases beyond the union average is able to undo the interest rate effect of unification, but further magnifies the spread of the relative debt levels.Download Info
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3491.Length:
Date of creation: Aug 2002
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Handle: RePEc:cpr:ceprdp:3491
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Keywords: (relative) public debt; central bank independence; externalities; monetary union; real interest rates; substitutability;Other versions of this item:
- Roel Beetsma & Koen Vermeylen, 2007. "The effect of monetary unification on public debt and its real return," Public Choice, Springer, vol. 133(3), pages 393-415, December.
- Roel Beetsma & Koen Vermeylen, 2005. "The Effect of Monetary Unification on Public Debt and its Real Return," CESifo Working Paper Series 1400, CESifo Group Munich.
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-14 (All new papers)
- NEP-IFN-2003-03-14 (International Finance)
- NEP-MAC-2003-03-14 (Macroeconomics)
- NEP-RMG-2003-03-14 (Risk Management)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Jerome Creel & Jacques Le Cacheux, 2003. "Inflation divergence and public deficits in a monetary union," Documents de Travail de l'OFCE 2003-05, Observatoire Francais des Conjonctures Economiques (OFCE).
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