Assessing the Pre-Crisis Advantages of the EMU for Sovereign Debt Issuers: A Panel VAR Analysis

We study the relationship between public debt and the real long-term interest rates in the countries currently members of the European Monetary Union (EMU) to assess its long-run macroeconomic performance. We employ a panel VAR method using annual data from 1970 to 2008. We find that before the introduction of the euro different levels of public debt affected the responses of the interest rates to debt shocks, with larger effects in high-debt countries relatively to lowdebt ones. The inclusion of the EMU years, shows the stabilizing role played by the monetary union in insulating the interest rates from domestic fiscal developments.