Determinants of Government Bond Spreads in New EU Countries

Abstract

Non-technical summary 1 Introduction 2 Literature review and objective of the paper 3 Methodological issues and data description 3.1 The model 3.2 Choice of variables 4 Empirical results 4.1 Long-run determinants and short-run dynamics 4.2 Do investors differentiate across the new EU countries? 4.3 Dynamics of fundamental-driven spreads 4.4 Robustness checks 5 Policy implications and conclusions References Appendices European Central Bank Working Paper Series CONTENTS 4 ECB Working Paper Series No

External asymmetries in the Euro-area and the role of Foreign Direct Investment

“…11 More specifically, in accordance with the existing literature, we observe that current account deficits relative to Germany are positively related to sovereign spreads in the long run [see e.g. Alexopoulou et al (2009), Attinasi et al (2009) and Barrios et al (2009)]. 12 Hence, the higher the current account deficit, the more the economy is perceived as vulnerable to reversals in international flows of funding.…”

“…Recent studies show that, especially since the intensification of the financial crisis, highly indebted EMU countries with large external deficits are also found to experience the highest sovereign bond yield spreads [e.g. Alexopoulou et al (2009), Attinasi et al (2009), Barrios et al (2009)]. The pairwise correlations for the post-EMU era between government debt, current account and sovereign spreads in Figures 1 and 2, as expected, indicate that the current account (government debt) relative to Germany is negatively (positively) correlated with sovereign spreads.…”

Sovereign Spreads and Financial Market Behaviour before and during the Crisis

“…Especially macroeconomic and fiscal projected data come at low frequency (bi-annually). This problem is usually solved by linear or cubic interpolation to quarterly or even monthly frequency (see: Alexopoulou et al, 2009, Schuknecht et al, 2010.…”

Level, Slope, Curvature of the Sovereign Yield Curve, and Fiscal Behaviour

“…Yet another part of this research has focused on the determinants -including the fiscal ones -of the long-term yield spreads between new European Union countries and other European states and benchmarks such as the US or the German bonds (see e.g. Nickel, Rother and Rülke, 2009;Alexopolou, Bunda and Ferrando, 2009).…”