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Debt and Interest Rates: The U.S. and the Euro Area

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  • Frankel, Jeffrey
  • Chinn, Menzie D.

Abstract

We find that real interest rates paid on government debt depend significantly upon current and expected future levels of debt, in Europe as in the US. But this result only emerges when we condition on foreign interest rates, illustrating financial international integration. The previously strong effect of debt on US interest rates has been diluted by the addition of 2004-2006 data to the sample, perhaps reflecting the effect of massive purchases of US securities by foreign central banks. Another finding is that the asymmetry in the effect of US interest rates on European interest rates has not disappeared with the coming of European Economic and Monetary Union in 1999, as one might have thought. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2007-11.

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Date of creation: 2007
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Handle: RePEc:zbw:ifwedp:5525

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Keywords: interest rates; inflation; debt; financial integration;

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Cited by:
  1. Caporale, Guglielmo Maria & Girardi, Alessandro, 2013. "Fiscal spillovers in the Euro area," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 84.e1-84.e1.
  2. Gabrisch, Hurbert & Orlowski, Lucjan & Pusch, Toralf, 2012. "Sovereign Default Risk in the Euro-Periphery and the Euro-Candidate Countries," Working Papers 2012002, Sacred Heart University, John F. Welch College of Business.
  3. Peter Claeys & Rosina Moreno & Jordi SuriƱach, 2008. "Fiscal policy and interest rates: the role of financial and economic integration," IREA Working Papers 200810, University of Barcelona, Research Institute of Applied Economics, revised Sep 2008.

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