Fiscal Policy and the Term Premium in Real Interest Rate Differentials

Thomas Flavin and Michele G. Limosani
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Michele G. Limosani: Universita di Messina, Italy.

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: This paper seeks to identify the source of the risk premium in real interest rate differentials across European countries. In particular, we examine 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. Our 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.

Keywords: Fiscal policy; interest rate differentials. (search for similar items in EconPapers)
Pages: 12 pages
Date: 1998-04
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Journal Article: Fiscal policy and the term premium in real interest rate differentials (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:may:mayecw:n830498

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