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The effect of monetary unification on public debt and its real return

  • Roel Beetsma

    ()

  • Koen Vermeylen

    ()

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.

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File URL: http://hdl.handle.net/10.1007/s11127-007-9196-3
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Article provided by Springer in its journal Public Choice.

Volume (Year): 133 (2007)
Issue (Month): 3 (December)
Pages: 393-415

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Handle: RePEc:kap:pubcho:v:133:y:2007:i:3:p:393-415
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100332

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