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Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies

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Author Info

  • Tigran Poghosyan

Abstract

We analyze determinants of sovereign bond yields in 22 advanced economies over the 1980-2010 period using panel cointegration techniques. The application of cointegration methodology allows distinguishing between long-run (debt-to-GDP ratio, potential growth) and short-run (inflation, short-term interest rates, etc.) determinants of sovereign borrowing costs. We find that in the long-run, government bond yields increase by about 2 basis points in response to a 1 percentage point increase in government debt-to-GDP ratio and by about 45 basis points in response to a 1 percentage point increase in potential growth rate. In the short-run, sovereign bond yields deviate from the level determined by the long-run fundamentals, but about half of the deviation adjusts in one year. When considering the impact of the global financial crisis on sovereign borrowing costs in euro area countries, the estimations suggest that spreads against Germany in some European periphery countries exceeded the level determined by fundamentals in the aftermath of the crisis, while some North European countries have benefited from “safe haven†flows.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/271.

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Length: 26
Date of creation: 08 Nov 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/271

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Related research

Keywords: Bonds; Europe; Developed countries; Economic models; Cross country analysis; Government bond yields; long-run and short-run determinants; panel cointegration;

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References

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  1. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, 06.
  2. Plosser, Charles I., 1987. "Fiscal policy and the term structure," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 343-367, September.
  3. Wachtel, Paul & Young, John, 1987. "Deficit Announcements and Interest Rates," American Economic Review, American Economic Association, vol. 77(5), pages 1007-12, December.
  4. Thorbecke, Willem, 1993. "Why deficit news affects interest rates," Journal of Policy Modeling, Elsevier, vol. 15(1), pages 1-11, February.
  5. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
  6. Jesper Lindé, 2001. "Fiscal policy and interest rates in a small open economy," Finnish Economic Papers, Finnish Economic Association, vol. 14(2), pages 65-83, Autumn.
  7. Richard Cebula, 2000. "Impact of budget deficits on ex post real long-term interest rates," Applied Economics Letters, Taylor & Francis Journals, vol. 7(3), pages 177-179.
  8. Knot, Klaas & de Haan, Jakob, 1995. "Fiscal policy and interest rates in the European community," European Journal of Political Economy, Elsevier, vol. 11(1), pages 171-187, March.
  9. Elmendorf, D.W., 1993. "Actual Budget Deficit Expectations and Interest Rates," Harvard Institute of Economic Research Working Papers 1639, Harvard - Institute of Economic Research.
  10. Antonio Di Cesare & Giuseppe Grande & Michele Manna & Marco Taboga, 2012. "Recent estimates of sovereign risk premia for euro-area countries," Questioni di Economia e Finanza (Occasional Papers) 128, Bank of Italy, Economic Research and International Relations Area.
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Cited by:
  1. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers 379, Netherlands Central Bank, Research Department.
  2. Salvatore Dell'Erba & Sergio Sola, 2013. "Does Fiscal Policy Affect Interest Rates? Evidence From A Factor-Augmented Panel," IMF Working Papers 13/159, International Monetary Fund.

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