The Euro-dividend: public debt and interest rates in the Monetary Union
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.
|Date of creation:||Feb 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Via delle Pandette 9 50127 - Firenze - Italy|
Phone: +39 055 2759707
Fax: +39 055 2759913
Web page: http://www.disei.unifi.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Elmendorf, Douglas W. & Gregory Mankiw, N., 1999.
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669
- 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. & Mankiw, N, 1999. "Government Debt," Scholarly Articles 2643866, Harvard University Department of Economics.
- Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government Debt," NBER Working Papers 6470, National Bureau of Economic Research, Inc.
- Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government Debt," Harvard Institute of Economic Research Working Papers 1820, Harvard - Institute of Economic Research.
- Carlo Ambrogio Favero & Francesco Giavazzi & Luigi Spaventa, .
"High Yielders: the Spread on German Interest Rates,"
102, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- 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.
- Carlo Favero & Francesco Giavazzi & Luigi Spaventa, 1996. "High Yields: The Spread on German Interest Rates," NBER Working Papers 5408, National Bureau of Economic Research, Inc.
- 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.
- Charles L. Evans & David A. Marshall, 2001. "Economic determinants of the nominal treasury yield curve," Working Paper Series WP-01-16, Federal Reserve Bank of Chicago.
- R. Glenn Hubbard & Eric M. Engen, 2004. "Federal Government Debt and Interest Rates," AEI Economics Working Papers 50018, American Enterprise Institute.
- Riccardo Faini, 2006. "Fiscal policy and interest rates in Europe," Economic Policy, CEPR;CES;MSH, vol. 21(47), pages 443-489, 07.
- Thomas Laubach, 2009.
"New Evidence on the Interest Rate Effects of Budget Deficits and Debt,"
Journal of the European Economic Association,
MIT Press, vol. 7(4), pages 858-885, 06.
- Thomas Laubach, 2003. "New evidence on the interest rate effects of budget deficits and debt," Finance and Economics Discussion Series 2003-12, Board of Governors of the Federal Reserve System (U.S.).
- Andrew Ang & Monika Piazzesi, 2001.
"A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables,"
NBER Working Papers
8363, National Bureau of Economic Research, Inc.
- Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
- Nooman Rebei & Hafedh Bouakez, 2004.
"Why Does Private Consumption Rise After a Government Spending Shock?,"
Econometric Society 2004 North American Summer Meetings
417, Econometric Society.
- Hafedh Bouakez & Nooman Rebei, 2007. "Why does private consumption rise after a government spending shock?," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 954-979, August.
- Nooman Rebei & Hafedh Bouakez, 2004. "Why Does Private Consumption Rise After a Government Spending Shock?," Computing in Economics and Finance 2004 20, Society for Computational Economics.
- Hafedh Bouakez & Nooman Rebei, 2003. "Why Does Private Consumption Rise After a Government Spending Shock?," Staff Working Papers 03-43, Bank of Canada.
- Linnemann, Ludger & Schabert, Andreas, 2004. "Can fiscal spending stimulate private consumption?," Economics Letters, Elsevier, vol. 82(2), pages 173-179, February.
- Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2004.
"Sovereign risk premia in the European government bond market,"
Working Paper Series
0369, European Central Bank.
- Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2004. "Sovereign risk premia in the European government bond market," ZEI Working Papers B 26-2003, University of Bonn, ZEI - Center for European Integration Studies.
- 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.
- 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.
- Feldstein, Martin & Horioka, Charles, 1980.
"Domestic Saving and International Capital Flows,"
Royal Economic Society, vol. 90(358), pages 314-29, June.
- 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.
When requesting a correction, please mention this item's handle: RePEc:flo:wpaper:2010-04. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michele Gori)
If references are entirely missing, you can add them using this form.