Fiscal Policy and Interest Rates in Europe

Abstract

The paper by Faini focuses on the relationship between fiscal policy and interest rates. With reference to the European context, the paper addresses two issues. First, it investigates whether national fiscal policies either affect country specific spreads or the average level of euro-area interests rates. Only in the latter case there are significant externalities on the area from national misbehaviour. Second, it discusses whether this negative externality is likely to be more important for high-debt countries. The empirical analysis shows that while national fiscal policy has a limited impact on spreads, it has a more important impact on the area interest rates. Moreover, lack of fiscal discipline in high debt countries has a stronger impact on interest rates. Nevertheless, the problem is not high debt per se, but high debt together with lack of fiscal discipline.