Fiscal policy and the term premium in real interest rate differentials

Thomas Flavin and M. G. Limosani

Applied Financial Economics, 2000, vol. 10, issue 4, 413-417

Abstract: The paper seeks to identify the source of the risk premium in real interest rate differentials across European countries. In particular, the link between real interest rate differentials existing between various European countries and Germany, and domestic fiscal policy as proxied by the Debt/GDP ratios in these countries is examined. Results provide strong evidence that this variable exerts a significant influence on the determination of both the level and the volatility of the differential for both long-term and short-term interest rates. This is a noteworthy result bearing in mind the Maastricht criteria for European Monetary Union and the importance attached to convergence of Debt/GDP ratios.

Date: 2000
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Working Paper: Fiscal Policy and the Term Premium in Real Interest Rate Differentials (1998)
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DOI: 10.1080/09603100050031534

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