The impact of public debt on the long-term interest rates in the euro area member countries during 2003-2010

Abstract

The main aim of the article is to analyze the relationship between public debt and the real, long-term interest rates in the euro area member countries during 2003-2010. The first part dealt with theoretical analysis and the most important results of empirical studies concerning the relationship between public debt and the real, long-term interest rates. In the next part of article, there were examined the relationships between public debt and the real, long-term interest rates in the euro area countries by using the Vector Autoregression Model (VAR). There were estimated elasticity coefficients of the real, long-term interest rates to public debt and measured the impact strength of public debt to changes in the real, long-term interest rate in the euro area member countries using the impulse response function. This was followed by decomposition of the real, long-term interest rate to estimate the impact of public debt and the real, long-term interest rate changes on the volatility of the real, long-term interest rate in the euro area member countries.