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Vertical debt spillovers in EMU countries

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  • Van Hecke, Annelore

Abstract

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.

Suggested Citation

  • Van Hecke, Annelore, 2013. "Vertical debt spillovers in EMU countries," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 468-492.
  • Handle: RePEc:eee:jimfin:v:37:y:2013:i:c:p:468-492
    DOI: 10.1016/j.jimonfin.2013.06.011
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    Cited by:

    1. Feld, Lars P. & Kalb, Alexander & Moessinger, Marc-Daniel & Osterloh, Steffen, 2017. "Sovereign bond market reactions to no-bailout clauses and fiscal rules – The Swiss experience," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 319-343.
    2. Sola, Sergio & Palomba, Geremia, 2016. "Sub-nationals' risk premia in fiscal federations: Fiscal performance and institutional design," Journal of International Money and Finance, Elsevier, vol. 63(C), pages 165-187.
    3. Agustín Molina-Parra & Diego Martínez-López, 2015. "Do federal deficits motivate regional fiscal (im)balances? Evidence from the Spanish case," Working Papers. Collection A: Public economics, governance and decentralization 1503, Universidade de Vigo, GEN - Governance and Economics research Network.
    4. Zuccardi Huertas Igor Esteban, 2015. "Sovereign Spreads in the Eurozone: Is Market Discipline Working?," Working Papers 2015-20, Banco de México.

    More about this item

    Keywords

    Fiscal federalism; Public debt; Intergovernmental relations; Spillovers;

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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