Long-term government bond yields and economic forecasts: evidence for the EU

Abstract

I use a panel of semi-annual vintages of growth and fiscal forecasts of the European Commission, covering the period 1998:II–2008:II, to assess its effects on 10-year government yields for 14 EU countries. Results show that yields increase with better growth forecasts and with decreases in budget balance-to-GDP rations, signaling that sovereigns may need to pay more to finance higher budget deficits in the market.

Acknowledgements

I am grateful to Philipp Rother and Guido Wolswijk for their useful comments. UECE is supported by FCT (Fundaμão para a Ciência e a Tecnologia, Portugal) and financed by ERDF and Portuguese funds. The opinions expressed are those of the author and do not necessarily reflect those of the ECB or the Eurosystem.

Notes

¹See Evans (1985) and Wachtel and Young (1987).

²See Codogno et al. (2003), Bernoth et al. (2004) and Afonso and Strauch (2007).

³France's sovereign debt kept its AAA rating during this period, whereas Greece that had BBB status in 1998 reached A+ in 2003 and was recently downgraded to A– by Standard & Poor's.

⁴Euro area (changing composition)–equity/index, Dow Jones STOXX price index–historical close, end of period–Euro, provided by the ECB.

⁵Panel unit roots tests reject the unit root null for the change in the yield.