We demonstrate that average interest rates in the EMU countries in 1990-98, with the exception of the period of exchange market turmoil in 1992-93, moved very closely with average output gaps and inflation as suggested by the Taylor rule

We study the determinants of sovereign bond spreads in the euro area since the introduction of the euro. We show that an aggregate risk factor is a main driver of spreads. This factor also plays an important indirect role for risk spreads through its interaction with the size and structure of...