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Advisor(s)
Abstract(s)
Acknowledging the potential detrimental impact that twin-deficits may have on sovereign risk, this study uses a two-step approach to assess the impact of fiscal and external sustainability on sovereign risk dynamics for a panel of 27 European Economies between 2001Q4 and 2022Q3. To do so, we first estimate a country-specific time-varying measure of fiscal sustainability, through the cointegration between government revenues and expenditures, and of external sustainability, derived from the exports-imports cointegration. We then resort to those time-varying coefficients to assess their impact on sovereign risk, proxied by 10-year CDS and CDS spreads (against the US) making use of Weighted Least Squares (WLS) analysis. Noticeably, we show that an improvement of both fiscal and external sustainability lead to a reduction in sovereign risk. This phenomenon becomes notably pronounced, particularly when examining countries experiencing an upward trajectory in their public debt levels.
Description
Keywords
Sovereign Risk Fiscal Sustainability External Sustainability CDS CDS spreads
Pedagogical Context
Citation
Afonso, António, José Alves e Sofia Monteiro (2024). "Sovereign risk dynamics in the EU : the time varying relevance of fiscal and external (im)balances". REM Working paper series, nº 0311/2024
Publisher
ISEG – REM (Research in Economics and Mathematics)