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The Effect of Monetary Unification on Public Debt and its Real Return

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  • Beetsma, Roel
  • Vermeylen, Koen

Abstract

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.

Suggested Citation

  • Beetsma, Roel & Vermeylen, Koen, 2002. "The Effect of Monetary Unification on Public Debt and its Real Return," CEPR Discussion Papers 3491, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3491
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    Cited by:

    1. Jerome Creel & Jacques Le Cacheux, 2003. "Inflation divergence and public deficits in a monetary union," Documents de Travail de l'OFCE 2003-05, Observatoire Francais des Conjonctures Economiques (OFCE).
    2. Eichler, Stefan, 2012. "Financial crisis risk, ECB “non-standard” measures, and the external value of the euro," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 257-265.
    3. Séverine Menguy, 2013. "Inflationary Consequences of the Indebtedness Levels of the Member Countries in a Monetary Union," The Journal of European Theoretical and Applied Studies, The Center for European Studies at Kirklareli University - Turkey, vol. 1(1), pages 87-111.

    More about this item

    Keywords

    (relative) public debt; central bank independence; externalities; monetary union; real interest rates; substitutability;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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