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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 by Tigran Poghosyan
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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.
International Monetary Fund; November 2012
26 pages; ISBN 9781475542790
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Title: Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies
Author: Tigran Poghosyan
 
ISBNs
1475542798
9781475529142
9781475542790
9781475543537