Public debt and monetary policy transmission: evidence from advanced and emerging Europe

Using high-frequency euro area monetary policy shocks and panel local projections for the period 2001-2020, this paper examines how macroeconomic variables respond based on the level and the maturity structure of public debt. The results show that public debt plays a significant role in influencing monetary policy transmission. Higher public debt is associated with a weaker response of prices and inflation expectations to tighter monetary policy, while output declines at least as much as in low-debt economies. The maturity structure of debt also matters in a non-linear way: debt at intermediate maturities is associated with weaker effects, whereas debt at very short and long maturities is associated with stronger effects. Fiscal responses indicate a lack of contemporaneous fiscal backing, as primary balances tend to deteriorate following monetary tightening. Finally, for non-euro area European economies, the paper introduces a novel dataset on public debt maturity profiles and shows that spillovers from euro area monetary policy depend on the maturity structure in the receiving economy.