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

November 8, 2012

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Tigran Poghosyan. Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies, (USA: International Monetary Fund, 2012) accessed November 21, 2024

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.

Subject: Bond yields, Financial institutions, Financial services, Fiscal policy, Fiscal stance, Public debt, Sovereign bonds, Yield curve

Keywords: Bond yield, Bond yields, Debt ratio, Fiscal stance, Global, Government bond bond yield, Government bond yields, Inflation, Long-run and short-run determinants, Panel cointegration, Real bond yields, Sovereign bond bond yield, Sovereign bond yield, Sovereign bonds, WP, Yield curve

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/271
Stock No:

WPIEA2012271
ISBN:

9781475529142
ISSN:

1018-5941

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