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Fiscal Policy and the Term Premium in Real Interest Rate Differentials

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Author Info
Thomas J. Flavin () (Economics, National University of Ireland, Maynooth)
Michele G. Limosani (Universita di Messina, Italy.)

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Abstract

This paper seeks to identify the source of the risk premium in real interest rate differentials across European countries. In particular, we examine the link between real interest rate differentials, existing between various European countries and Germany, and domestic fiscal policy as proxied by the Debt/GDP ratios in these countries. Our results provide strong evidence that this variable exerts a significant influence on the determination of both the level and the volatility of the differential for both long term and short term interest rates. This is a noteworthy result bearing in mind the Maastricht criteria for European Monetary Union and the importance attached to convergence of Debt/GDP ratios.

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Publisher Info
Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n830498.

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Length: 12 pages
Date of creation: Apr 1998
Date of revision:
Handle: RePEc:may:mayecw:n830498

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Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.may.ie/academic/economics/
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Related research
Keywords: Fiscal policy; interest rate differentials.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers 14, Cowles Foundation, Yale University. [Downloadable!]
  2. Andrew Clare et al, . "Macroeconomic Shocks and the Domestic CAPM: Evidence from the UK Stock Market," CERF Discussion Paper Series 93-02, Economics and Finance Section, School of Social Sciences, Brunel University.
  3. Engel, Charles & Rodrigues, Anthony P, 1989. "Tests of International CAPM with Time-Varying Covariances," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(2), pages 119-38, April-Jun. [Downloadable!] (restricted)
    Other versions:
  4. Charles M. Engel & Anthony P. Rodrigues, 1992. "Tests of mean-variance efficiency of international equity markets," Research Paper 9209, Federal Reserve Bank of New York.
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  5. Frankel, Jeffrey A. & MacArthur, Alan T., 1988. "Political vs. currency premia in international real interest differentials : A study of forward rates for 24 countries," European Economic Review, Elsevier, vol. 32(5), pages 1083-1114, June. [Downloadable!] (restricted)
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  6. Tobin, James, 1982. "Money and Finance in the Macroeconomic Process," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(2), pages 171-204, May. [Downloadable!] (restricted)
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  7. Andrew Clare & Raymond O'Brien & Stephen Thomas & Michael Wickens, . "Macroeconomic Shocks and the Domestic CAPM: Evidence from the UK Stock Market," Discussion Papers 94/10, Department of Economics, University of York.
  8. Thoms, S. H., 1993. "An international CAPM for bonds and equities," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 390-412, August. [Downloadable!] (restricted)
  9. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Thomas J. Flavin & Michele G. Limosani, 2000. "Explaining European Short-term Interest Rate Differentials: An Application of Tobin's Portfolio Theory," Economics, Finance and Accounting Department Working Paper Series n1000500, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
  2. Marc D. Hayford, 2005. "Fiscal policy and national saving," Applied Economics, Taylor and Francis Journals, vol. 37(9), pages 981-992, May. [Downloadable!] (restricted)
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