The Government Debt and the Long-Term Interest Rate: Application of the Loanable Funds Model to Greece
Yu Hsing ()
Additional contact information Yu Hsing: Southeastern Louisiana University, Postal: Department of Management and Business Administration,, College of Business, Southeastern Louisiana University, Hammond, LA 70402 USA
This paper extends the open-economy loanable funds model to Greece and finds that a higher government debt/GDP ratio, a higher real short-term rate, a higher percent change in real GDP, a higher expected inflation rate, a higher EU government bond yield, or a higher nominal effective exchange rate increases the Greek government bond yield. In the conventional closed-economy loanable funds model, similar results are found, but the explanatory power is lower. In the conventional open-economy loanable funds model, the percent change in real GDP and the ratio of the net capital inflow to GDP have insignificant coefficients.