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Title:The effect of monetary unification on public debt and its real return PDF Logo
Authors:Beetsma, Roel
Vermeylen, Koen
Issue Date:2005
Series/Report no.:CESifo working papers 1400
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 the debt increases. Also, the share of the unionwide debt issued by relatively myopic governments or of countries that initially have a relatively dependent central bank increases after unification. This may put the political sustainability of the union under pressure. A transfer scheme that penalizes debt increases beyond the union average is able to undo the interest rate effect of unification, but magnifies the spread in relative debt levels.
Subjects:monetary union
(relative) public debt
interest rates
externalities
substitutability
central bank independence
JEL:E62
E63
F33
E42
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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