Short and long-term interest rate risk: The sovereign balance-sheet nexus

We compute stock-flow adjustments (SFA) using sovereign balance sheet developments, and assess their effects on short and long-term interest rates for 14 European countries between 1970 and 2015, in a panel and SUR analysis. We find that an increase in SFA reduces long- and short-term interest rates, with higher reductions for short-term rates. Furthermore, the decreasing effects of an increment in the stock-flow have reduced since the 2008–2009 financial crisis. As expected, there is also an upward push on both interest rates from a rise in sovereign indebtedness.