Debt and interest rates: lessons from european monetary union

Riccardo Lo Conte ()
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Riccardo Lo Conte: Università degli Studi di Milano

Economics Bulletin, 2010, vol. 30, issue 4, 2732-2750

Abstract: This paper addresses the relationship between debt and interest rates within the context of the European Monetary Union which, after ten years since its creation, constitutes a convenient framework to test any sensible explanation. My findings highlight that a substantial fraction of European interest rate is accounted for by domestic fiscal fundamentals. Identification of the relative importance of fiscal variables requires joint modelling of international rates to distinguish between the effects of their common dynamics from credit risk implications of worsening fiscal conditions. The estimated model also quantifies liquidity premia.

Keywords: Debt; interest rates; spreads; VECM; cointegration (search for similar items in EconPapers)
JEL-codes: E4 G1 (search for similar items in EconPapers)
Date: 2010-10-21
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