Debt Contagion in Europe: A Panel-Vector Autoregressive (VAR) Analysis

Abstract

The European sovereign-debt crisis began in Greece when the government announced in December, 2009, that its debt reached 121% of GDP (or 300 billion euros) and its 2009 budget deficit was 12.7% of GDP, four times the level allowed by the Maastricht Treaty. The Greek crisis soon spread to other Economic and Monetary Union (EMU) countries, notably Ireland, Portugal, Spain and Italy. Using quarterly data for the 2000-2011 period, we implement a panel-vector autoregressive (PVAR) model for 11 EMU countries to examine the extent to which a rise in a country's bond-yield spread or debt-to-GDP ratio affects another EMU countries' fiscal and macroeconomic outcomes. To distinguish between interdependence and contagion among EMU countries, we compare results obtained for the pre-crisis period (2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007) with the crisis period (2008)(2009)(2010)(2011) and control for global risk aversion.

Government spending and economic growth: a trivariate causality testing

“…First, panel models contain more information, more variability and are more efficient. Specifically, there are more degrees of freedom gained by estimating a panel of countries as they can exploit both cross-section and time-series information of the data (Bouvet et al, 2013;Baltagi, 2008). Second, our PVAR approach combines the traditional VAR approach and the panel-data approach while controlling for endogenous dependent and explanatory variables.…”

“…Second, our PVAR approach combines the traditional VAR approach and the panel-data approach while controlling for endogenous dependent and explanatory variables. Third, the approach enables us to adequately model spillovers from one country to another since it accounts for unobserved country-specific heterogeneity (Bouvet et al, 2013). This produces a consistent and improved estimator (Love and Zicchino, 2006;Holtz-Eakin et al, 1988).…”

Sovereign CDS spread determinants and spill-over effects during financial crisis: A panel VAR approach

“…Diebold and Yilmaz (2012) use a Generalized VAR framework and report that although significant volatility fluctuations exist in all their sample markets, cross-market volatility spillovers were quite bordered until the global financial crisis outburst in 2007. Bouvet, et al (2014), employ a PVAR model for EMU countries to investigate the effect of yield spreads in fiscal variables.…”

“…Our motivation behind the chosen Cholesky ordering of the variables is as follows: CDS spreads are listed last since it is the variable of interest (all the other variables are treated as determinants of CDS spreads), and thus responds to itself in time t and only with a lag to the other variables. VIX, Euribor-Eonia spread, and iTraxx are listed first, second, and third in the ordering, respectively, since they represent global variables (US and EU) and empirical evidence indicates that global variables should be ordered first (Bouvet et al, 2014). The rest of the variables are listed next, as domestic variables.…”

Credit risk, monetary policy and investor sentiment during financial crisis in Europe

“…VIX, Euribor-Eonia spread, and iTraxx are listed first, second, and third in the ordering, respectively, since they represent global variables (US and EU) and empirical evidence indicates that global variables should be ordered first (Bouvet et al, 2014). The rest of the variables are listed next, as domestic variables.…”