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Sovereign risk and corporate cost of borrowing: Evidence from a counterfactual study

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  • Wolski, Marcin

Abstract

We assess the impact of the sovereign risk spill-overs onto corporate cost of borrowing in selected euro area countries. We utilize a novel nonparametric dependence filtering frame- work to remove the effects of sovereign risk in the interest rate pass-through context. The main findings confirm the heterogeneity in sovereign risk spill-overs. We also find divergence in sovereign risk transmission between core and peripheral Member States during financial and sovereign debt crises. We discover that the standard linear models may underestimate the underlying pass-through distortions, suggesting the existence of nonlinear sovereign risk effects.

Suggested Citation

  • Wolski, Marcin, 2018. "Sovereign risk and corporate cost of borrowing: Evidence from a counterfactual study," EIB Working Papers 2018/05, European Investment Bank (EIB).
    • Handle: RePEc:zbw:eibwps:201805
    DOI: 10.2867/801038
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    More about this item

    Keywords

    counterfactual distributions; nonparametric methods; sovereign risk; cost of borrowing; pass-through;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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