Fiscal determinants of government borrowing costs: do we have only ourselves to blame?

Alen Bobetko, Mirna Dumicic Jemric and Josip Funda
Additional contact information
Alen Bobetko: Croatian National Bank, Zagreb, Croatia
Josip Funda: Croatian National Bank, Zagreb, Croatia

Financial Theory and Practice, 2013, vol. 37, issue 2, 135-159

Abstract: The global financial crisis and the problems in peripheral EU countries resulted in increased attention to fiscal developments and their impact on borrowing costs for both public and private sector. Existing theoretical literature suggests that worsening of current and expected budget balances as well as an increase of public debt lead to a rise in short and long term interest rates for sovereign debtors. However, empirical results are inconclusive, especially for emerging market countries. This paper analyzes the factors that determine the dynamics of government bond spreads, with special emphasis on fiscal indicators. The survey covered 17 European countries, of which 9 are developed and 8 are emerging market economies, all of them members of the EU except Croatia. The empirical part of the paper employs dynamic panel data method and uses the Arellano and Bond estimator to get consistent estimates of parameters of interest. The results show that in the period 2004-2011 fiscal balance and public debt projections had a significant impact on the differences in government bond yields for emerging market countries, with the effect being much stronger during the period after the onset of financial crises. On the other hand, it seems that sovereign spread dynamics in developed countries is driven mostly by the global market sentiment.

Keywords: sovereign bond spreads; expected fiscal developments; EU countries; Croatia (search for similar items in EconPapers)
JEL-codes: F34 G12 H68 (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://fintp.ijf.hr/upload/files/ftp/2013/2/bobetko_dumicic_funda.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:ipf:finteo:v:37:y:2013:i:2:p:135-159

Access Statistics for this article

More articles in Financial Theory and Practice from Institute of Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Martina Fabris ().