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

Roel Beetsma and Koen Vermeylen

No 1400, CESifo Working Paper Series from CESifo

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 the debt increases. Also, the share of the unionwide debt issued by relatively myopic governments or of countries that initially have a relatively dependent central bank increases after unification. This may put the political sustainability of the union under pressure. A transfer scheme that penalizes debt increases beyond the union average is able to undo the interest rate effect of unification, but magnifies the spread in relative debt levels.

Keywords: monetary union; (relative) public debt; interest rates; externalities; substitutability; central bank independence (search for similar items in EconPapers)
JEL-codes: E42 E62 E63 F33 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp1400.pdf (application/pdf)

Related works:
Journal Article: The effect of monetary unification on public debt and its real return (2007)
Working Paper: The Effect of Monetary Unification on Public Debt and its Real Return (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1400

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().