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Authors
Advisor(s)
Abstract(s)
Using monthly data for 10 euro area countries between 1999:01 and 2015:12, we take
a new three-step methodological approach: first, we inspect the key determinants of
10-year government bond yield spreads; second, we compute country-specific timevarying
coefficient models of spreads’ determinants; third, we use these estimates as
explanatory variables in panel regressions using output volatility as the dependent
variable.We find that better fiscal positions or higher-than-expected economic growth
prospects reduce the yield spreads,while increases in theVIX, bid-ask spread, debt-to-
GDP ratio or real effective exchange rate appreciation increase the spreads.Moreover,
the responsiveness of the yield spread determinants increased in the run-up to the global
financial crisis. Finally, for the case of the budget balance and real growth (bid-ask
spread, debt-to-GDP ratio, real effective exchange rate and VIX), the larger (higher)
in absolute value the corresponding spread’s responsiveness, the lower (higher) the
economic volatility.
Description
Keywords
Volatility Fiscal Policy Bond Spreads Errors-in-Variables Time-Varying Coefficients Instrumental Variables Cross-Sectional Dependence
Pedagogical Context
Citation
Afonso, António and João Tovar Jalles. (2020)."Economic volatility and sovereign yields’ determinants: a time-varying approach". Empirical Economics, Vol. 58, No.2: pp. 427-451.
Publisher
Springer