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Short and long-term interest rate risk: The sovereign balance-sheet nexus

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  • Afonso, António
  • Alves, José

Abstract

We compute stock-flow adjustments (SFA) using sovereign balance sheet developments, and assess their effects on short and long-term interest rates for 14 European countries between 1970 and 2015, in a panel and SUR analysis. We find that an increase in SFA reduces long- and short-term interest rates, with higher reductions for short-term rates. Furthermore, the decreasing effects of an increment in the stock-flow have reduced since the 2008–2009 financial crisis. As expected, there is also an upward push on both interest rates from a rise in sovereign indebtedness.

Suggested Citation

  • Afonso, António & Alves, José, 2019. "Short and long-term interest rate risk: The sovereign balance-sheet nexus," Finance Research Letters, Elsevier, vol. 31(C).
    • Handle: RePEc:eee:finlet:v:31:y:2019:i:c:s1544612318302423
    DOI: 10.1016/j.frl.2018.11.014
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    References listed on IDEAS

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    Cited by:

    1. José Alves & Clarisse Wagner, 2024. "Leveraging interest-growth differentials: Hidden effects of government financial assets in the European Union," Working Papers REM 2024/0307, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    2. Bachleitner, Alena & Prammer, Doris, 2024. "Don’t blame the government!? An assessment of debt forecast errors with a view to the EU Economic Governance Review," European Journal of Political Economy, Elsevier, vol. 82(C).

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    More about this item

    Keywords

    Stock-flow adjustment; Debt; Interest rates; SUR; Panel data;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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