Sovereign currency and long-term interest rates in advanced economies from 1879 to 2016

Abstract

ABSTRACT This paper explores the effects of government debts and deficits on long-term interest rates under different international monetary systems from the perspective of monetary sovereignty. The findings of this paper confirm conventional accounts of financial crowding-out and the adverse impact of growing public debt on interest rates among countries under the classical Gold Standard period (1879–1913) and non-sovereign countries under the recent fiat system (1973–2016). By contrast, countries in the Bretton Woods era (1959–1970) and sovereign countries in the contemporary post-Bretton Woods era (1973–2016) do not exhibit such positive debt-interest rates relationships while still showing crowding-out but with much less magnitude. Overall, the results support the Modern Money Theory (MMT) view that the consequence of monetary sovereignty from 1879 to 2016 is to remove, or greatly attenuate, the impact of default risk, fiscal balance, and bond vigilantes on the interest rate.