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Fiscal Policy and the Term Premium in Real Interest Rate Differentials

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  • 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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    File URL: http://economics.nuim.ie/sites/economics.nuim.ie/files/working-papers/N830498.pdf
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    Bibliographic 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://economics.nuim.ie
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    Related research

    Keywords: Fiscal policy; interest rate differentials.;

    References

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    1. 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.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
    3. 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.
    4. 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.
    5. 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.
    6. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers 14, Cowles Foundation for Research in Economics, Yale University.
    7. 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.
    8. 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.
    9. Jeffrey A. Frankel and Alan T. MacArthur., 1987. "Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries," Economics Working Papers 8762, University of California at Berkeley.
    10. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
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