Modelling and Forecasting Yield Differentials in the euro area. A non-linear Global VAR model

Carlo Favero

No 431, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: Unstability in the comovement among bond spreads in the euro area is an important feature for dynamic econometric modelling and forecasting. This paper proposes a non-linear GVAR approach to spreads in the euro area where the changing interdepence among these variables is modelled by making each country spread function of a global variable determined by fiscal fundamentals with a time-varying composition. The model naturally accommodates the possibility of multiple equilibria in the relation between default premia and local fiscal fundamentals. The estimation reveals a significant non-linear relation between spreads and fiscal fundamentals that generates time-varying impulse response of local spreads to shocks in other euro area countries spreads. The GVAR framework is then applied to the analysis of the dynamic effects of fiscal stabilization packages on the cost of government borrowing and to the evaluation of the importance of potential contagion effects determining a significant increase in cross-market linkages after a shock to a group of countries.

Date: 2012
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-eec and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://repec.unibocconi.it/igier/igi/wp/2012/431.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:igi:igierp:431

Ordering information: This working paper can be ordered from
https://repec.unibocconi.it/igier/igi/

Access Statistics for this paper

More papers in Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University via Rontgen, 1 - 20136 Milano (Italy).
Bibliographic data for series maintained by ().