Public Debt and Monetary Policy Transmission in Europe

This technical report examines the relationship between public debt and monetary policy transmission in both advanced and emerging European economies. It utilizes high-frequency euro area monetary policy shocks and panel local projections from 2001 to 2020 to analyze how macroeconomic variables respond to changes in the level and maturity structure of public debt. The findings indicate that higher public debt weakens the response of prices and inflation expectations to tighter monetary policy, while output declines similarly to low-debt economies. The report highlights that the maturity structure of debt influences these effects non-linearly, with intermediate maturities showing weaker impacts compared to very short and long maturities. Additionally, it discusses the lack of contemporaneous fiscal backing following monetary tightening and introduces a novel dataset on public debt maturity profiles for non-euro area European economies, emphasizing the importance of maturity structure in understanding monetary policy spillovers. The paper contributes to the literature by addressing gaps in understanding the public debt channels of monetary policy transmission in the euro area context.