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The credit channel of the sovereign spread: A Bayesian SVAR analysis

Author

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  • Cafiso, Gianluca
  • Missale, Alessandro
  • Rivolta, Giulia

Abstract

Sovereign bond spread shocks are thought to threaten debt sustainability mainly through their impact on refinancing costs. Our analysis sheds light on a less evident channel, we call it the spread-credit channel. It originates from the negative impact of spread shocks on bank loans, which can trigger a “diabolic loop” between slowing economic activity, high debt, increasing spreads and banks’ vulnerability. Contrary to other studies in the literature, we identify the structural shocks to the Italian spread using a Proxy-SVAR model. The Bayesian estimation of the Proxy-SVAR shows that spread shocks negatively affect bank lending and economic activity making the debt-to-GDP ratio increase. Debt sustainability also depends on how investors react to shocks. We find evidence that foreigners disinvest, while domestic investors buy more debt when it becomes riskier.

Suggested Citation

  • Cafiso, Gianluca & Missale, Alessandro & Rivolta, Giulia, 2025. "The credit channel of the sovereign spread: A Bayesian SVAR analysis," Economic Modelling, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:ecmode:v:144:y:2025:i:c:s0264999324003419
    DOI: 10.1016/j.econmod.2024.106984
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    More about this item

    Keywords

    Sovereign bonds; Sovereign spread shocks; Bank lending; Public debt sustainability;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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