IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Vertical debt spillovers in EMU countries

  • Van Hecke, Annelore
Registered author(s):

    This article examines the extent to which subnational governments may drive sovereign risk premiums. Is subnational fiscal policy affecting the interest rates on central government bonds? Furthermore, we focus on a number of causal mechanisms that may mitigate or reinforce these upstream vertical spillovers, i.e. the presence of bailout expectations and subnational borrowing autonomy. Our findings indicate that debt accumulation by subnational governments (SNG) spills over onto sovereign risk premiums when the restrictions on SNG borrowing are weak and when investors believe that subsovereign debts are backed by the center. The results suggest that spillovers may be reduced through a proper design of a country's fiscal and institutional framework; countries should either bolster the sovereignty of subnational governments by increasing SNG fiscal autonomy, or tightening up SNG borrowing constraints.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0261560613000843
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 37 (2013)
    Issue (Month): C ()
    Pages: 468-492

    as
    in new window

    Handle: RePEc:eee:jimfin:v:37:y:2013:i:c:p:468-492
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Moessinger, Marc-Daniel & Feld, Lars P. & Kalb, Alexander & Osterloh, Steffen, 2013. "Sovereign Bond Market Reactions to Fiscal Rules and No-Bailout Clauses The Swiss Experience," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79807, Verein für Socialpolitik / German Economic Association.
    2. Oscar Bernal Diaz & Kim Oosterlinck & Ariane Szafarz, 2008. "Observing bailout expectations during a total eclipse of the sun," Working Papers CEB 08-015.RS, ULB -- Universite Libre de Bruxelles.
    3. Gravelle, Toni, 1999. "Liquidity of the Government of Canada Securities Market: Stylized Facts and Some Market Microstructure Comparisons to the United States Treasury Market," Working Papers 99-11, Bank of Canada.
    4. Kerstin Bernoth & Guntram B. Wolff, 2008. "Fool The Markets? Creative Accounting, Fiscal Transparency And Sovereign Risk Premia," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(4), pages 465-487, 09.
    5. Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2009. "Government risk premiums in the bond market: EMU and Canada," European Journal of Political Economy, Elsevier, vol. 25(3), pages 371-384, September.
    6. Mink, Mark & de Haan, Jakob, 2013. "Contagion during the Greek sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 102-113.
    7. Francesco Caselli, 1998. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," IMF Working Papers 98/55, International Monetary Fund.
    8. James M. Poterba & Kim S. Rueben, 1997. "State Fiscal Institutions and the U.S. Municipal Bond Market," NBER Working Papers 6237, National Bureau of Economic Research, Inc.
    9. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2003. "Sovereign risk premia in the European government bond market," ZEI Working Papers B 26-2003, ZEI - Center for European Integration Studies, University of Bonn.
    10. Schulz, Alexander & Wolff, Guntram B., 2008. "The German sub-national government bond market: evolution, yields and liquidity," Discussion Paper Series 1: Economic Studies 2008,06, Deutsche Bundesbank, Research Centre.
    11. Stefano Schiavo, 2005. "Euro bonds: in search of financial spillovers," Department of Economics Working Papers 0502, Department of Economics, University of Trento, Italia.
    12. Guglielmo Maria Caporale & Alessandro Girardi, 2011. "Fiscal Spillovers in the Euro Area," Discussion Papers of DIW Berlin 1164, DIW Berlin, German Institute for Economic Research.
    13. Laurence Booth & George Georgopoulos & Walid Hejazi, 2007. "What drives provincial-Canada yield spreads?," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 1008-1032, August.
    14. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
    15. Jan J.G. Lemmen, 1999. "Managing Government Default Risk in Federal States," FMG Special Papers sp116, Financial Markets Group.
    16. Volkerink, Bjorn & De Haan, Jakob, 2001. " Fragmented Government Effects on Fiscal Policy: New Evidence," Public Choice, Springer, vol. 109(3-4), pages 221-42, December.
    17. A. Lans Bovenberg & Jeroen J. M. Kremers & Paul R. Masson, 1991. "Economic and Monetary Union in Europe and Constraints on National Budgetary Policies," IMF Staff Papers, Palgrave Macmillan, vol. 38(2), pages 374-398, June.
    18. Riccardo Faini, 2006. "Fiscal policy and interest rates in Europe," Economic Policy, CEPR;CES;MSH, vol. 21(47), pages 443-489, 07.
    19. Landon, Stuart & Smith, Constance E., 2007. "Government debt spillovers in a monetary union," The North American Journal of Economics and Finance, Elsevier, vol. 18(2), pages 135-154, August.
    20. Bertrand Candelon & Amadou N. R. Sy & Rabah Arezki, 2011. "Sovereign Rating News and Financial Markets Spillovers: Evidence From the European Debt Crisis," IMF Working Papers 11/68, International Monetary Fund.
    21. Jürgen Von Hagen & Massimo Bordignon & Bhajan S. Grewal & Per Peterson & Helmut Seitz & Matz Dahlberg, 2000. "Subnational Government Bailouts in OECD Countries: Four Case Studies," Research Department Publications 3100, Inter-American Development Bank, Research Department.
    22. Jong-Wha Lee & Kwanho Shin, 2005. "IMF Bailouts and Moral Hazard," International Finance 0501005, EconWPA.
    23. Ingunn LØnning, 2000. "Default premia on European government debt," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(2), pages 259-283, June.
    24. Alexander Plekhanov & Raju Jan Singh, 2005. "How Should Subnational Government Borrowing Be Regulated? Some Cross-Country Empirical Evidence," IMF Working Papers 05/54, International Monetary Fund.
    25. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States," CEPR Discussion Papers 1088, C.E.P.R. Discussion Papers.
    26. David Haugh & Patrice Ollivaud & David Turner, 2009. "What Drives Sovereign Risk Premiums?: An Analysis of Recent Evidence from the Euro Area," OECD Economics Department Working Papers 718, OECD Publishing.
    27. Heppke-Falk, Kirsten H. & Wolff, Guntram B., 2007. "Moral hazard and bail-out in fiscal federations: evidence for the German Länder," Discussion Paper Series 1: Economic Studies 2007,07, Deutsche Bundesbank, Research Centre.
    28. Dell'Ariccia, Giovanni & Schnabel, Isabel & Zettelmeyer, Jeromin, 2006. "How Do Official Bailouts Affect the Risk of Investing in Emerging Markets?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1689-1714, October.
    29. Stuart Landon & Constance E. Smith, 2000. "Government debt spillovers and creditworthiness in a federation," Canadian Journal of Economics, Canadian Economics Association, vol. 33(3), pages 634-661, August.
    30. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from the U.S. States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1046-59, November.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:37:y:2013:i:c:p:468-492. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.