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Does the composition of government spending matter for government bond spreads?

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  • Combes, Jean-Louis
  • Minea, Alexandru
  • Sawadogo, Pegdéwendé Nestor

Abstract

This paper contributes to the literature on fiscal policy as a determinant of government bond spreads. We analyze the effect of government spending on government bond spreads using a panel of 30 emerging countries during the period 2000–2013. Based on system-GMM estimations, we find that total public spending does not affect government bond spreads. Instead, we reveal a composition effect: higher current spending (public investment) increase (decrease) government bond spreads. This result may arise due to the fact that current (less productive) spending may be associated with lower growth prospects, making investors to require higher premia. Finally, we unveil nonlinearities driven by the quality of institutions: in particular, good institutions support a more favorable impact of current spending on government bond spreads. Our findings suggest that governments of emerging countries can improve their international financing conditions by reducing current spending and supporting public investment.

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  • Combes, Jean-Louis & Minea, Alexandru & Sawadogo, Pegdéwendé Nestor, 2021. "Does the composition of government spending matter for government bond spreads?," Economic Modelling, Elsevier, vol. 96(C), pages 409-420.
    • Handle: RePEc:eee:ecmode:v:96:y:2021:i:c:p:409-420
    DOI: 10.1016/j.econmod.2020.03.025
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    2. Yacouba COULIBALY & Alexandru MINEA & Patrick VILLIEU, 2022. "How Do Natural Resource – Backed Loans Affect the Public Debt Sustainability in Developing Countries? Empirical Evidence," LEO Working Papers / DR LEO 2937, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.

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    More about this item

    Keywords

    Government bond spreads; Government current spending; Public investment;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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