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Government risk premiums in the bond market: EMU and Canada

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  • Schuknecht, Ludger
  • von Hagen, Jürgen
  • Wolswijk, Guido

Abstract

This paper focuses on risk premiums paid by central governments in Europe and sub-national governments in Germany, Spain, and Canada, using data for bond yield spreads for the period 1991-2005. We find that risk premiums by central governments respond positively to debt and deficits; German states enjoyed a favourable position in financial markets before EMU but not thereafter; Spanish and Canadian provinces risk premiums over the whole period; German and Spanish sub-central governments pay liquidity-related interest rate premiums; Canadian and German provinces/states that benefit from fiscal equalization lower spreads. This is evidence of market discipline at work and of credibility of the EU no-bailout clause.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:poleco:v:25:y:2009:i:3:p:371-384
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    More about this item

    Keywords

    Interest rates Fiscal policy Government debt Bail out Regional public finances;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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

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