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Is the recent increase in long-term interest rates a threat to euro-area recovery?

Clayes, Gregory, Efstathiou, Konstantinos, (2017), «Is the recent increase in long-term interest rates a threat to euro-area recovery?», Bruegel, 29 Μαΐου

After reaching historically low levels in the first half of 2016, European long-term sovereign yields experienced a notable increase in the second half of 2016 and at the beginning of 2017, before stabilising in the last few months.

The nominal long-term interest rate can be decomposed into the following components: a risk-free rate, various premia to compensate investors for future inflation and potential defaults, and a term premium.

All of these components have been on a downward trend over the last few years. But some of these trends might have reversed in the second half of 2016, leading to an increase in long-term yields.

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