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Budgetary Decomposition and Yield Spreads

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  • António Afonso
  • João Tovar Jalles

Abstract

With a panel VAR of 10 Euro area countries we study 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. Key Words – fiscal components, bond yields, Great Recession, PVAR, impulse responses.

Suggested Citation

  • António Afonso & João Tovar Jalles, 2016. "Budgetary Decomposition and Yield Spreads," Working Papers Department of Economics 2016/05, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    • Handle: RePEc:ise:isegwp:wp052016
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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G01 - Financial Economics - - General - - - Financial Crises
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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