Christian Bayer, Chi Hyun Kim, Alexander Kriwoluzky, 06 September 2018

Investors fret that Italy may exit the euro. One reason to worry is redenomination risk, driven by the prospect of a country allowing a new currency to depreciate against the euro. This column compares two types of Italian bond yield curves to estimate such risk, and finds that the yield premium due to it peaked at 7% during the sovereign debt crisis. Redenomination risk also affects interest rates in strong economies, which implies a redistribution between savers and borrowers throughout the euro area.

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