Budgetary Decomposition and Yield Spreads

Antonio Afonso and Joao Jalles

No 2016/05, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: With a panel VAR of 10 Euro area countries we study the budgetary determinants of government bond yield spreads vis-à-vis Germany between 1999Q1 and 2012Q4. We find that rising bid ask, VIX and debt differentials increase yield spreads; and improvements in the budget balance, higher growth prospects and depreciation lower the spreads. Moreover, rises in public wages or in social expenditure increase spreads, while increases in direct and indirect taxes lower the yield spreads. In the post-2007Q3 crisis period, rising expenditure components (except subsidies) increased spreads. Key Words – fiscal components, bond yields, Great Recession, PVAR, impulse responses.

JEL-codes: C23 E62 G01 H62 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-mac
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Journal Article: Budgetary decomposition and yield spreads (2016)
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