A threshold model for the spread

Dimitris Hatzinikolaou and Sarigiannidis Georgios ()
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Sarigiannidis Georgios: Eikos Co Consulting firm, Napoleon Zerva 28-30, 45332 Ioannina, Greece

Studies in Nonlinear Dynamics & Econometrics, 2023, vol. 27, issue 1, 67-82

Abstract: Using annual data from two panels, one of 11 Eurozone countries and another of 31 OECD countries, we estimate a two-regime log-linear as well as a nonlinear model for the spread as a function of macroeconomic and quality-of-institutions variables. The two regimes, a high-spread and a low-spread regime, are distinguished by using a threshold, in accordance with the perceived “fair” value of the spread as a reference point. Our results suggest that government-bond spreads are regime-dependent, as most of the regression coefficients of the determinants of the spread are larger (in absolute value) in the high-spread regime than in the low-spread regime. That is, an improvement in the macroeconomic environment (e.g., lower unemployment, lower inflation, lower growth of the debt-to-GDP ratio, less macroeconomic uncertainty, higher growth of real GDP), and/or an improvement in the quality of institutions (e.g., less corruption) reduce the spread facing a country (by enhancing its creditworthiness) to a greater extent in high-spread situations than in low-spread situations. A possible explanation is that the demand for and the supply of loans are inelastic at higher than “fair” interest rates and elastic at lower rates.

Keywords: macroeconomic risk; spread; threshold (search for similar items in EconPapers)
JEL-codes: E44 F34 G01 G12 G15 H63 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/snde-2020-0007

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