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A threshold model for the spread

Author

Listed:
  • Hatzinikolaou Dimitris

    (Department of Economics, University of Ioannina University Campus, 45110 Ioannina, Greece)

  • Sarigiannidis Georgios

    (Eikos Co Consulting firm, Napoleon Zerva 28-30, 45332 Ioannina, Greece)

Abstract

Using annual data from two panels, one of 11 Eurozone countries and another of 31 OECD countries, we estimate a two-regime log-linear as well as a nonlinear model for the spread as a function of macroeconomic and quality-of-institutions variables. The two regimes, a high-spread and a low-spread regime, are distinguished by using a threshold, in accordance with the perceived “fair” value of the spread as a reference point. Our results suggest that government-bond spreads are regime-dependent, as most of the regression coefficients of the determinants of the spread are larger (in absolute value) in the high-spread regime than in the low-spread regime. That is, an improvement in the macroeconomic environment (e.g., lower unemployment, lower inflation, lower growth of the debt-to-GDP ratio, less macroeconomic uncertainty, higher growth of real GDP), and/or an improvement in the quality of institutions (e.g., less corruption) reduce the spread facing a country (by enhancing its creditworthiness) to a greater extent in high-spread situations than in low-spread situations. A possible explanation is that the demand for and the supply of loans are inelastic at higher than “fair” interest rates and elastic at lower rates.

Suggested Citation

  • Hatzinikolaou Dimitris & Sarigiannidis Georgios, 2023. "A threshold model for the spread," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 27(1), pages 67-82, February.
    • Handle: RePEc:bpj:sndecm:v:27:y:2023:i:1:p:67-82:n:7
    DOI: 10.1515/snde-2020-0007
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    References listed on IDEAS

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    More about this item

    Keywords

    macroeconomic risk; spread; threshold;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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