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The Euro-dividend: public debt and interest rates in the Monetary Union

  • Simone Salotti


    (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze)

  • Luigi Marattin


    (Dipartimento di Scienze Economiche, Universita` degli Studi di Bologna)

The ongoing massive fiscal policy stimulus triggered increasing concerns on the potential impact on interest rate levels, as economic theory predicts. Particularly, the deterioration of some EMU countries’ fiscal positions has been putting at risk Eurozone’ financial stability. In this paper, we estimate a Panel VAR (PVAR) model on the EMU area employing annual data from 1970 to 2008 in order to assess the qualitative and quantitative impact of public debt on interest rates. Our results show that prior to the introduction of the Euro an increase in public debt led to positive and significant effect on long-term nominal interest rates, with a stronger effect for high-debt countries. After the introduction of the single currency, the effect vanishes (in line with Bernoth 2004). We interpret this result as a confirmation of the crucial role of the monetary union in weakening the automatic risk-premium-based channel between debt shocks and returns on government bond.

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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Mathematical Economics with number 2010-04.

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Length: 21 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:flo:wpaper:2010-04
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  1. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
  2. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
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  5. Miller, Stephen M. & Russek, Frank S., 1996. "Do federal deficits affect interest rates? Evidence from three econometric methods," Journal of Macroeconomics, Elsevier, vol. 18(3), pages 403-428.
  6. Hafedh Bouakez & Nooman Rebei, 2003. "Why Does Private Consumption Rise After a Government Spending Shock?," Staff Working Papers 03-43, Bank of Canada.
  7. Favero, Carlo A. & Giavazzi, Francesco & Spaventa, Luigi, 1996. "High Yields: The Spread on German Interest Rates," CEPR Discussion Papers 1330, C.E.P.R. Discussion Papers.
  8. Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government debt," Finance and Economics Discussion Series 1998-09, Board of Governors of the Federal Reserve System (U.S.).
    • Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
  9. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  10. Riccardo Faini, 2006. "Fiscal policy and interest rates in Europe," Economic Policy, CEPR;CES;MSH, vol. 21(47), pages 443-489, 07.
  11. R. Glenn Hubbard & Eric M. Engen, 2004. "Federal Government Debt and Interest Rates," Working Papers 50018, American Enterprise Institute.
  12. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2004. "Sovereign risk premia in the European government bond market," Working Paper Series 0369, European Central Bank.
  13. Linnemann, Ludger & Schabert, Andreas, 2004. "Can fiscal spending stimulate private consumption?," Economics Letters, Elsevier, vol. 82(2), pages 173-179, February.
  14. Evans, Charles L. & Marshall, David A., 2007. "Economic determinants of the nominal treasury yield curve," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1986-2003, October.
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