Budgetary decomposition and yield spreads

ABSTRACT

With a panel VAR of 10 Euro area countries, we studied 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.

KEYWORDS:

• Fiscal components
• bond yields
• great recession
• PVAR
• impulse responses

JEL CLASSIFICATION:

• C23
• E62
• G10
• H62

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 This is a forward mean-differencing approach that removes only the mean of all future observations available for each country-year.

2 The countries included are Belgium, Greece, Spain, France, Ireland, Italy, the Netherlands, Austria, Portugal and Finland.

Additional information

Funding

UECE is supported by Fundação para a Ciência e a Tecnologia (FCT), Portugal.