Euro Bonds: In Search of Financial Spillovers

Universita Degli Studio di Trento Discussion Paper No. 2

62 Pages Posted: 20 Jan 2005

See all articles by Stefano Schiavo

Stefano Schiavo

University of Trento - Department of Economics and Management; OFCE

Date Written: January 2005

Abstract

The paper investigates the empirical relevance of the negative financial spillovers hypothesis according to which fiscal imbalances in one EMU member country bid up the interest rate faced by all other participants in the currency union. This idea questions the ability of financial markets to correctly price various types of risk now that the elimination of exchange rate fluctuations and the rapid integration of national government bond markets have made securities issued by different European governments closer substitutes. The paper takes an eclectic approach and tackles the issue from different angles, reviewing historical episodes, testing the Ricardian equivalence hypothesis in Europe as a whole and finally analyzing the impact of domestic and foreign fiscal variables on European bond yields. Despite the strong comovements displayed by European interest rates, empirical evidence does not support the idea that fiscal variables are a key determinant of these interrelations.

Keywords: Spillovers, Stability and Growth Pact, EMU, government bonds

JEL Classification: F36, F42, G15

Suggested Citation

Schiavo, Stefano, Euro Bonds: In Search of Financial Spillovers (January 2005). Universita Degli Studio di Trento Discussion Paper No. 2, Available at SSRN: https://ssrn.com/abstract=651262 or http://dx.doi.org/10.2139/ssrn.651262

Stefano Schiavo (Contact Author)

University of Trento - Department of Economics and Management ( email )

via Inama, 5
Trento, 38100
Italy

OFCE

Valbonne, 06560
France

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