Which combination of fiscal and external imbalances to determine the long-run dynamics of sovereign bond yields?

Melika Ben Salem and Barbara Castelletti ()

Working papers from Banque de France

Abstract: In the aftermath of the crisis, sovereign risk premium differentials have been increasingly widening. Although the perceived risk for core countries remains relatively low, financial markets seem to discriminate among peripheral economies requiring higher risk premia than what is justified by fiscal factors only. Our hypothesis in this study is that in peripheral countries this is not simply the result of fiscal indiscipline but the combination of both internal and external imbalances. We use a yearly post-1980 OECD-country panel data to estimate the joint dynamics of sovereign bond yields and their long-run determinants. We find that a net foreign position that is considered highly deteriorated can be a differentiating factor for investors. Indeed, the existence of a twin deficit put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term.

Keywords: Sovereign bond yields; Public Debt; Net Foreign Assets; Panel error-correction models. (search for similar items in EconPapers)
JEL-codes: C23 E43 G12 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:606

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