Fiscal Policy and the Term Premium in Real Interest Rate Differentials
AbstractThis 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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Bibliographic InfoPaper 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.
Length: 12 pages
Date of creation: Apr 1998
Date of revision:
Fiscal policy; interest rate differentials.;
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