Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies

Tigran Poghosyan

No 2012/271, IMF Working Papers from International Monetary Fund

Abstract: We analyze determinants of sovereign bond yields in 22 advanced economies over the 1980-2010 period using panel cointegration techniques. The application of cointegration methodology allows distinguishing between long-run (debt-to-GDP ratio, potential growth) and short-run (inflation, short-term interest rates, etc.) determinants of sovereign borrowing costs. We find that in the long-run, government bond yields increase by about 2 basis points in response to a 1 percentage point increase in government debt-to-GDP ratio and by about 45 basis points in response to a 1 percentage point increase in potential growth rate. In the short-run, sovereign bond yields deviate from the level determined by the long-run fundamentals, but about half of the deviation adjusts in one year. When considering the impact of the global financial crisis on sovereign borrowing costs in euro area countries, the estimations suggest that spreads against Germany in some European periphery countries exceeded the level determined by fundamentals in the aftermath of the crisis, while some North European countries have benefited from “safe haven” flows.

Keywords: WP; bond yield; government bond bond yield; inflation; Government bond yields; long-run and short-run determinants; panel cointegration; debt ratio; sovereign bond bond yield; sovereign bond yield; real bond yields; Bond yields; Yield curve; Sovereign bonds; Fiscal stance; Global (search for similar items in EconPapers)
Pages: 26
Date: 2012-11-08
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Citations: View citations in EconPapers (45)

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Journal Article: Long-run and short-run determinants of sovereign bond yields in advanced economies (2014)
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