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Euro area sovereign yield spreads as determinants of private sector borrowing costs

Thomas Theobald () and Silke Tober

No 193-2018, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: We regress long-term private sector interest rates on a money market rate, a term premium and credit risk. As a contribution to the current debate about European safe assets, our interest is in quantifying domestic spillover effects from euro area sovereign bond spreads. Panel estimates show significant, albeit rather small long-run effects. Our findings indicate large cross-country differences but no evidence that the effect has become stronger over time. Using linear country-specific estimates, we find the effect to be significant in only some countries, the size of the maximum effect exceeding the average one more than three-fold. For one country, we also find a highly significant asymmetrical effect with positive spread changes having greater impact on private-sector borrowing costs than negative ones. Overall, we conclude that contagion costs in the euro area are substantial and will remain so until an effective form of European safe assets is created.

Keywords: autoregressive distributed lag; composite cost of borrowing; sovereign spread (search for similar items in EconPapers)
JEL-codes: E43 F36 G10 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2018
New Economics Papers: this item is included in nep-eec and nep-mac
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Journal Article: Euro area sovereign yield spreads as determinants of private sector borrowing costs (2020) Downloads
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