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Government risk premiums in the bond market: EMU and Canada

Ludger Schuknecht (), Juergen von Hagen () and Guido Wolswijk ()

European Journal of Political Economy, 2009, vol. 25, issue 3, 371-384

Abstract: This paper focuses on risk premiums paid by central governments in Europe and sub-national governments in Germany, Spain, and Canada, using data for bond yield spreads for the period 1991-2005. We find that risk premiums by central governments respond positively to debt and deficits; German states enjoyed a favourable position in financial markets before EMU but not thereafter; Spanish and Canadian provinces risk premiums over the whole period; German and Spanish sub-central governments pay liquidity-related interest rate premiums; Canadian and German provinces/states that benefit from fiscal equalization lower spreads. This is evidence of market discipline at work and of credibility of the EU no-bailout clause.

Keywords: Interest; rates; Fiscal; policy; Government; debt; Bail; out; Regional; public; finances (search for similar items in EconPapers)
Date: 2009
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Working Paper: Government risk premiums in the bond market: EMU and Canada (2008) Downloads
Working Paper: Government Risk Premiums in the Bond Market: EMU and Canada (2007) Downloads
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Handle: RePEc:eee:poleco:v:25:y:2009:i:3:p:371-384