The Crime of Fiscal Neglect and Punishment of High Rates – A Panel Study for EMU

Sammanfattning: This paper examines long-term interest rates and fiscal liabilities within EMU in the context of the recent sovereign debt crisis; where Greece, Ireland, Italy, Portugal and Spain faced rising interest rates in contrast to the rest of the EMU. An assessment of the short and long-run properties of long rates, fiscal deficits and government debt are estimated for 11 EMU countries in the time span 1999-2015. This is done through different fixed-effects models, 2SLS and Panel-DOLS. No long-run relationship between the variables is found. Results also show that fiscal deficits have a positive effect on long rates and the interaction between deficits and debt enhance the overall impact on rates, in particular to fiscally vulnerable countries. Unexpectedly, government debt show a negative effect on interests, a result explained in the context of ECB’s role as lender of last resort and the asymmetric effects among EMU members. In conclusion, results suggest a subjective punishment for fiscal inadequacy through long-term rates.