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Government risk premiums in the bond market: EMU and Canada

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

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0176-2680(09)00011-1
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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 25 (2009)
Issue (Month): 3 (September)
Pages: 371-384

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Handle: RePEc:eee:poleco:v:25:y:2009:i:3:p:371-384
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505544

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