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

Roel Beetsma and Koen Vermeylen

No 3491, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 this debt increases. Also, the share of the debt issued by relatively short-sighted governments, or by countries that initially have a relatively dependent central bank, increases after unification. A transfer scheme that penalizes debt increases beyond the union average is able to undo the interest rate effect of unification, but further magnifies the spread of the relative debt levels.

Keywords: Monetary union; (relative) public debt; Real 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: 2002-08
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-rmg
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Citations: View citations in EconPapers (5)

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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 (2005)
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