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Determinants of OECD countries’ sovereign yields: safe havens, purgatory, and the damned

Author

Listed:
  • C. Bortoli
  • L. Harreau
  • C. Pouvelle

Abstract

In this paper, we estimate the determinants of the spreads between the 10-year sovereign bond yields and the (interest rate) swap rate for a sample of 22 OECD countries over the January 1999-December 2013 period, using various models. Our main, fixed-effect, model highlights the crucial role of GDP growth, public deficit and debt liquidity in explaining the level of spreads, while the public debt-to-GDP ratio plays a lesser role. We find that our results are mainly driven by observations on euro area countries after the onset of the 2008 crisis, with observed spreads found to significantly exceed estimated values during the crisis for a number of euro area countries. We also shed light on the effect of unconventional monetary policies, while Target 2 balances are used for euro area countries in order to reflect concerns on the stability of the euro area. Finally, according to our cointegration model, we find a long-term relationship between the spread, the debt-to-GDP ratio, and potential GDP growth, with a larger impact of the latter variable.

Suggested Citation

  • C. Bortoli & L. Harreau & C. Pouvelle, 2014. "Determinants of OECD countries’ sovereign yields: safe havens, purgatory, and the damned," Working papers 494, Banque de France.
  • Handle: RePEc:bfr:banfra:494
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    References listed on IDEAS

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    More about this item

    Keywords

    interest rates; sovereign spreads; public debt; panel data.;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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