Interest-Rate Spread and Public-Debt Dynamics in a Two-Country Monetary-Union Portfolio Model

摘要: Tracking, monitoring and steering the evolution of public debt over time will be a major policy challenge for almost all governments in advanced countries years to come, particular those belonging European Monetary Union. In this paper I study dynamics two-country monetary union where representative, risk-averse wealth-owner optimizes his/her portfolio sovereign bonds issued common currency. obtain two main results with respect standard country-by-country approach. First, interest-rate spread between is endogenized as higher-debt country pays risk premium which proportional level its own other. Second, dynamic path becomes nonlinear dependent on other country’s debt. The most important implication that “dynamic interdependence” not fully considered implementation EMU fiscal rules, but it may jeopardize their goal convergence stability stocks.