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The impact of fiscal policy on government bond spreads in emerging markets

Author

Listed:
  • Ante Žigman

    (Croatian National Bank, Zagreb)

  • Boris Cota

    (Faculty of Economics and Business, Zagreb)

Abstract

Spreads on government bonds are a collective expression of differences in the level of development, risk, expected returns and other essential characteristics of states or regions the bond yields of which we wish to compare. At issue here is a collective expression of factors that work on the bond supply and demand side. These are for example the political environment (or political risks), expected return, economic risks, expected inflation, expected change in the exchange rate, solvency, way in which the bonds of a given state fit into the portfolios of the major investors and so on. The paper identifies the influence of fiscal and non-fiscal factors on movements in spreads on government bonds in emerging markets. The possibility of isolating fiscal from non-fiscal influences on spreads and the identification of the nature of fiscal impacts can be of great importance for the conduct of fiscal policy. The results obtained can be used for an optimisation of fiscal policy so as to avoid negative impacts on yields (i.e. a growth in yields), that is, a growth in the costs of government borrowing. This paper enlarges the line of research by querying whether the structure of deficit financing (domestic or foreign) has an impact on bond yields in emerging markets, and how this impact is reflected on the other determinants of fiscal policy.

Suggested Citation

  • Ante Žigman & Boris Cota, 2011. "The impact of fiscal policy on government bond spreads in emerging markets," Financial Theory and Practice, Institute of Public Finance, vol. 35(4), pages 385-412.
  • Handle: RePEc:ipf:finteo:v:35:y:2011:i:4:p:385-412
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Davor Kunovac, 2013. "The Borrowing Costs of Selected Countries of the European Union – the Role of the Spillover of External Shocks," Working Papers 38, The Croatian National Bank, Croatia.
    2. Davor Kunovac & Nina Pavić, 2017. "Can the Adoption of the Euro in Croatia Reduce the Cost of Borrowing?," Surveys 28, The Croatian National Bank, Croatia.
    3. Hrvoje Šimović, 2017. "Impact of public debt (un)sustainability on fiscal policy effectiveness in Croatia," EFZG Working Papers Series 1705, Faculty of Economics and Business, University of Zagreb.
    4. Kocsis, Zalan & Monostori, Zoltan, 2016. "The role of country-specific fundamentals in sovereign CDS spreads: Eastern European experiences," Emerging Markets Review, Elsevier, vol. 27(C), pages 140-168.
    5. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.

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