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Journal of Economic Integration 2010 December;25(4) :722-733.
The Government Debt and the Long-Term Interest Rate: Application of the Loanable Funds Model to Greece

Yu Hsing 

Southeastern Louisiana University
Copyright ©2010 Journal of Economic Integration

This paper extends the open-economy loanable funds model to Greece and finds that a higher government debt/GDP ratio, a higher real short-term rate, a higher percent change in real GDP, a higher expected inflation rate, a higher EU government bond yield, or a higher nominal effective exchange rate increases the Greek government bond yield. In the conventional closed-economy loanable funds model, similar results are found, but the explanatory power is lower. In the conventional open-economy loanable funds model, the percent change in real GDP and the ratio of the net capital inflow to GDP have insignificant coefficients.

JEL Classification: E43, E62, O52

Keywords: Government Debt | Long-term Interest Rate | Expected Inflation | World Interest Rate | Exchange Rate | Loanable Funds Model
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