Transmission of Fiscal Spillovers on Interest Rates in EMU

Abstract

In this paper we investigate the relationship between fiscal imbalances and long-term interest rates and assess various transmission channels of fiscal spillovers in EMU during 2002-2015. Our results support the importance of bilateral trade, informational and geographical channel of transmission, with spillovers accounting for more than 50 percent of the overall effect. Our findings suggest that if the share of public debt in GDP in all countries increases by 1 percentage point, the long-term interest rates of a given country will, on average, increase by 2.56-5.98 basis points, 1.9-3.61 basis points of which can be attributed to indirect effects.