The Driving Factors of EMU Government Bond Yields: The Role of Debt, Liquidity and Fiscal Councils

Anastasios Pappas and Ioannis Kostakis

IJFS, 2020, vol. 8, issue 3, 1-13

Abstract: This study presents empirical evidence about the determinants of long-term government bond yields for 19 economies of the European Monetary Union (EMU) over the period 1995–2018 within a multivariate panel framework. The fixed effects estimators reveal that the relationship between public debt to the GDP ratio and yields is non-linear. We observe a threshold, which is determined to be at the area 90% of the ratio of public debt to GDP. Beyond that, area government borrowing costs increase as the public debt rises. Furthermore, we find evidence that a GDP decline and the downgrades of sovereign ratings increase the costs of government borrowing. In contrast, the operation of independent fiscal institutions helps to reduce government’s debt risk premium. Finally, liquidity in the Euro area plays a significant role on yields determination. The results remain robust when the dynamic instrumental variable fixed effect (FE-2SLS) and dynamic panel least square dummy variable corrected (LSDVC) estimators are employed. Empirical findings suggest important policy implications for the ongoing Covid-19 crisis for the EMU.

Keywords: EMU; government bond yields; public debt; growth; liquidity; fiscal councils (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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