Can Interest Rate Spreads Stabilize the Euro Area?

34 Pages Posted: 19 Aug 2015

See all articles by Michal Brzoza-Brzezina

Michal Brzoza-Brzezina

National Bank of Poland; Warsaw School of Economics (SGH)

Jacek Kotlowski

Warsaw School of Economics, Institute of Econometrics

Kamil Wierus

NBP

Date Written: August 21, 2014

Abstract

Since the creation of the euro area significant interest rate spreads have arisen between Euro area countries, both for public and private debt. We check whether these spreads could be made to work towards the goal of providing more stability to the Euro area. In particular we focus on reducing the imbalances that arose between the core and peripheral members of the Euro area in the first decade of its existence. The idea is that stable positive spreads in peripheral countries could have decreased domestic demand, preventing the boom-bust cycles that plagued these economies. They could also prevent such developments in the future. We find that spreads on real interest rates of 0.6 to 5.5 percentage points would have been necessary to stabilize external positions of the four peripheral Euro area member countries.

Keywords: Euro area, imbalances, current account, panel estimation

JEL Classification: E32, E43, E52

Suggested Citation

Brzoza-Brzezina, Michal and Kotlowski, Jacek and Wierus, Kamil, Can Interest Rate Spreads Stabilize the Euro Area? (August 21, 2014). Available at SSRN: https://ssrn.com/abstract=2646553 or http://dx.doi.org/10.2139/ssrn.2646553

Michal Brzoza-Brzezina (Contact Author)

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH)

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Jacek Kotlowski

Warsaw School of Economics, Institute of Econometrics ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Kamil Wierus

NBP ( email )

United States

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