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Fiscal Policy and the Term Premium in Real Interest Rate Differentials

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  • Thomas J. Flavin

    (Economics, National University of Ireland, Maynooth)

  • Michele G. Limosani

    (Universita di Messina, Italy.)

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.

Suggested Citation

  • Thomas J. Flavin & Michele G. Limosani, 1998. "Fiscal Policy and the Term Premium in Real Interest Rate Differentials," Economics Department Working Paper Series n830498, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n830498
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    Cited by:

    1. Thomas J. Flavin & Michele G. Limosani, 2000. "Explaining European Short-term Interest Rate Differentials: An Application of Tobin's Portfolio Theory," Economics Department Working Paper Series n1000500, Department of Economics, National University of Ireland - Maynooth.
    2. Marc Hayford, 2005. "Fiscal policy and national saving," Applied Economics, Taylor & Francis Journals, vol. 37(9), pages 981-992.
    3. Flavin, Thomas J. & Limosani, Michele G., 2007. "Fiscal, monetary policy and the conditional risk premium in short-term interest rate differentials: an application of Tobin's portfolio theory," International Review of Economics & Finance, Elsevier, vol. 16(1), pages 101-112.

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