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

Author/Editor: Poghosyan, Tigran
Authorized for Distribution: November 8, 2012
Electronic Access: Free Full Text (PDF file size is 1,067KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
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Series: Working Paper No. 12/271
Subject(s): Bonds | Europe | Developed countries | Economic models | Cross country analysis
 
English  
    Published:   November 8, 2012        
    ISBN/ISSN:   9781475529142/2227-8885   Format:   Paper
    Stock No:   WPIEA2012271   Pages:   26
    Price:   US$18.00
       
     
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