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

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  • Beetsma, Roel
  • Vermeylen, Koen

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.

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  • Beetsma, Roel & Vermeylen, Koen, 2002. "The Effect of Monetary Unification on Public Debt and its Real Return," CEPR Discussion Papers 3491, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3491
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    2. Jerome Creel & Jacques Le Cacheux, 2003. "Inflation divergence and public deficits in a monetary union," Documents de Travail de l'OFCE 2003-05, Observatoire Francais des Conjonctures Economiques (OFCE).
    3. repec:hal:spmain:info:hdl:2441/2302 is not listed on IDEAS
    4. repec:spo:wpmain:info:hdl:2441/2302 is not listed on IDEAS
    5. repec:hal:wpspec:info:hdl:2441/2302 is not listed on IDEAS
    6. Eichler, Stefan, 2012. "Financial crisis risk, ECB “non-standard” measures, and the external value of the euro," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 257-265.

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    More about this item

    Keywords

    Monetary union; (relative) public debt; Real interest rates; Externalities; Substitutability; Central bank independence;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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