Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies
27 Pages Posted: 19 Dec 2012
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Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies
Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies
Date Written: November 2012
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: Bonds, Europe, Developed countries, Economic models, Cross country analysis, Government bond yields, long-run and short-run determinants, panel cointegration, bond yields, bond, government bond yields, government bond, sovereign bond, bond yield, government bond yield, bond spreads, money market, financial markets, money market rate, risk aversion, government bond market, market bond, capital stock, benchmark bond, benchmark government bond, real money market rate, money market rates, debt service, capital flows, real money market rates, government securities, bond market
JEL Classification: C23, E43, G12
Suggested Citation: Suggested Citation
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