Determinants of Real Long-Term Interest Rates in Europe: "Is It A Fiscal Phenomena?"
Several studies investigate the relationship between government debt/deficit ratios and the real long-term interest rates, but the empirical evidence is not conclusive enough for consensus building. Evidence for statistically weak or mixed association is as much as the evidence for a strong positive relationship, which means rising debt/deficit ratios are estimated to increase real yields. My research extends the existing literature by using a large panel of European countries covering the years 1990 and 2012. I find a very strong positive relationship between the debt to GDP ratio and real long-term interest rates in linear specifications. Quadratic specifications yield a U-curve structure in explaining the association between debt ratios and the real long-term yields, supporting evidence for a positive association once the debt ratio surpasses a threshold in the range of 49-54%.Key Words: General government debt, deficit, real long-term interest rates
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Vengelen, Bryan (Georgetown University, 2015)Following the financial crisis there were many questions raised about the proper role and efficacy of monetary and fiscal policy. One such area of debate surrounds the effects of changes to interest rates have on household ...
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