عوامل مؤثر بر حاکمیت میزان بازده اوراق قرضه در EMU. چشم انداز بهینه ارز منطقه

In the light of the recent financial crisis, we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the European Monetary Union. We find evidence for a level break in the cointegrating relationship. Moreover, results show that (i) fiscal imbalances – namely expected government debt-to-GDP differentials – are the main long-run drivers of sovereign spreads; (ii) liquidity risks and cumulated inflation differentials have non-negligible weights; but (iii) all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an Optimal Currency Area (OCA). In particular, we establish (i) that results are overall driven by those countries not passing the OCA test; and (ii) that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness.

The sovereign debt crisis, which escalated in the European Monetary Union (EMU) in 2010, has sparked big debates about its causes and possible solutions, both in academia and in policy institutions. Since the start of the EMU and before the financial crisis, spreads on 10-year sovereign bond yields relative to the German benchmark were small.2 With the financial crisis the picture completely changed. By the spring of 2009 the Greek sovereign bond spread had reached almost 300 basis points and by 2010 it had skyrocketed to over 1000 basis points (see Fig. 1). Investors started to question the ability of certain EMU governments of meeting their debt obligations and began requiring higher and higher risk premia.What are the determinants of sovereign bond yield spreads in the EMU? The empirical literature has identified both a common international time-varying factor – commonly dubbed as international risk aversion – and country specific factors – in particular default and liquidity risk – as potential determinants of sovereign bond yield spreads in the EMU. However, both in academic debates and in the context of policy-making, no clear consensus has arisen. As far as the default risk is concerned, Faini (2006), Hallerberg and Wolff (2008) and Bernoth et al. (2012) find that the budget balance and the stock of government debt have, on average, a significant impact on sovereign bond spreads, whereas Codogno et al. (2003) find that public debt plays a role only for Italy and Spain. As regards the liquidity risk component, Codogno et al. (2003) and Sgherri and Zoli (2009) find that liquidity explains only a small fraction of sovereign spreads, while Gomez-Puig (2006) and Barrios et al. (2009) show that liquidity is more important to explain euro area sovereign spreads. With respect to international risk aversion, Attinasi et al. (2010) show that this factor has substantially contributed to the change in sovereign bond spreads during the financial crisis. This paper adds to this debate by taking a long-run approach to the analysis of the determinants of sovereign bond yield spreads in nine EMU economies (Austria, Belgium, Finland, France, Greece, Italy, the Netherlands, Portugal and Spain) relative to Germany, by looking at the issue from the viewpoint of the theory of optimal currency areas (OCA).3 In particular, we argue (i) that long-run determinants of sovereign bond spreads are more relevant for policy-makers when they have to decide whether, and to what extent, structural policy interventions are needed to reduce sovereign bond yield differentials and (ii) that investors take OCA issues, and in particular diverging competitiveness among EMU members, seriously into account when they have to assign and price sovereign default risk. In order to take the first point into consideration – and this is also the first innovation of the paper relative to the existing literature – we base our investigation on recently-developed panel cointegration techniques that treat cross-sectional dependence via factor models, allow for potential breaks, and are robust to endogeneity. In fact, as regards cross-sectional dependence, we conjecture – and empirically test – that aspects of country interdependence, such as the economic and financial integration processes, the Maastricht convergence criteria, and the common monetary policy framework, cannot be neglected. In addition, given the evident shift in the level of sovereign bond yield spreads experienced during the financial crisis and the subsequent sovereign debt crisis (reported in Fig. 1), we believe that any analysis dealing with the determinants of sovereign spreads should take potential breaks into account. In this paper, we tackle these issues by testing for panel cointegration with break using the approach of Westerlund and Edgerton (2008). As far as the second point is concerned – and this is also the second novel feature of the paper – in addition to the standard measures of default and liquidity risk, we include cumulated inflation differentials among our explanatory variables, to capture asymmetric shocks leading to a divergence in competitiveness. In fact, even small differences in inflation rates, if persistent, can lead to sizable changes in relative price levels. As shown in Fig. 2, since the start of the monetary union, cumulated inflation differentials among EMU countries have persistently diverged. As noted by Estrada et al. (2012), in principle, persistent inflation differentials may both be a benign phenomenon explained by a structural convergence process according to a Balassa-Samuelson type of argument, and the source of long-lasting and damaging losses of competitiveness.4In order the former type of argument to hold, however, inflation rates should be positively correlated with the difference between labor productivity growth in the traded versus non-tradable sectors. While there is some evidence that this effect can justify some inflation differentials in the euro area, a consensus seems to have emerged around the claim that the Balassa-Samuelson hypothesis cannot be the general explanation of the persistent inflation differentials across EMU members (ECB, 2003 and Estrada et al., 2012). In particular, Estrada et al. (2012) argue that the heterogeneous inertial components of price and wage-setting rules across the EMU, such as those caused by wage indexation clauses, play a predominant role. Given the EMU fixed exchange rate regime, countries that have experienced persistent positive inflation differentials, have been subject to an appreciation of the real exchange rate. As noted by De Grauwe and Ji (2012), a country experiencing a real appreciation is likely to bump into problems of competitiveness which in turn may lead to current account deficits and debt problems.5 Regardless of the source of the imbalances, the appreciation of the real exchange rate for some EMU members has represented a gradual large asymmetric shock.6 As a result, one of the theoretical conditions for an OCA, which requires that a shock in one country should be sufficiently correlated with that in the rest of the union, or that the union has put in place measures to balance out asymmetric shocks, has clearly been violated (see Mundell, 1961).7 As far as our empirical results are concerned, we find evidence for a level break in the cointegrating relationship, which we ascribe to the EMU sovereign debt crisis. This indicates that, after the crisis, the expected higher risk awareness of investors keeps government bond yield spreads at a higher level than in the pre-crisis period. Moreover, results point at fiscal imbalances – in particular expected government debt-to-GDP differentials – as the main drivers of sovereign spreads, although liquidity risks have a non-negligible weight. Cumulated inflation differentials turn out to be a significant variable, its importance being of the same order of magnitude as liquidity risk. But, perhaps most importantly, their inclusion among the regressors allows us to establish that the conclusions we draw on sovereign bond yield spreads determinants are closely interlinked to whether or not diverging competitiveness significantly affects sovereign bond yield spreads themselves. In particular, we argue that a statistical significance attached to cumulated inflation differentials is an indication that the economies included in the sample of countries do not belong to an OCA. In fact, if shocks were sufficiently correlated or if the monetary union were able to absorb and balance out asymmetric shocks, then cumulated inflation differentials would be small and unimportant for sovereign bond yield spread determination.8 We iteratively run this test by excluding one country at a time from the full sample of countries, starting from that with the highest cumulated inflation differential relative to Germany, and going forward until such a variable becomes statistically insignificant. This process leads (i) to a grouping of countries into two categories corresponding to EMU core (Austria, Finland, France, Germany and the Netherlands) and EMU periphery (Belgium, Greece, Italy, Portugal and Spain), and (ii) to the finding that cointegrated panel regression results are clearly driven by the inclusion of the observations belonging to the peripheral EMU economies considered. In fact, when such observations are excluded, debt-to-GDP differentials turn out to be the least important determinant of the sovereign bond yield spread, while expected budget balance differentials and the liquidity risk carry the highest weights. It is noteworthy that while in the sample of peripheral countries a one-percent-point rise in the expected public-debt-to-GDP ratio differential leads, on average, to an 8.63 basis points increase in the sovereign bond yield spread; in the restricted sample pooling only core EMU economies, the same increase in the expected public-debt-to-GDP ratio differential leads, on average, to an increase in the sovereign spread of only 0.46 basis points. These results clearly unveil the fact that international investors heavily punish the deterioration of expected debt positions of those countries that face competitiveness gaps and hence are not being perceived as OCA members. The remainder of the paper is structured as follows. Section 2 describes the data employed in the estimation. Section 3 outlines the econometric methodology. Section 4 reports and discusses the results. Finally, Section 5 concludes and highlights policy implications. Technical details are appended to the paper.

This paper provides useful information for policy makers facing the difficult task of tackling high sovereign bond spreads with the aim of fostering greater public finance stability and ultimately guaranteeing EMU survival. Results primarily point at expected fiscal imbalances (namely expected government debt-to-GDP differentials) and liquidity risks as the main determinants of sovereign bond yield spreads in the long run. We find evidence for a level break in the relationship, occurring during the sovereign debt crisis. These results suggest that some EMU countries do need fiscal consolidation in order to remove imbalances and bring sovereign spreads to acceptable levels. Across the EMU, however, this is still a time of weak private demand and fiscal tightening may worsen economic conditions even further with a perverse effect on government debt-to-GDP ratios themselves. In the literature, there are ongoing debates on the appropriate timing (slow versus fast) and composition (expenditure versus tax-based) of fiscal consolidations and on whether high levels of public debt harm economic growth (see e.g. Batini et al., 2012 and Cantore et al., 2013; and Panizza and Presbitero, 2013 among others). Our paper does not take a stance in these particular debates. Nevertheless, by looking at the issue through the lens of the OCA theory, it is able to establish that this is only one important side of the coin. The other side, which we deem as equally important, is the extent to which EMU countries do form an OCA and, above all, whether investors take this information into account when they have to assess and price sovereign default risk. Our empirical analysis finds that cumulated inflation differentials have non-negligible weights in sovereign bond yield spread determination. If our full sample of countries comprised only OCA members, then cumulated inflation differentials would be negligible and, most importantly, they would have an immaterial effect on sovereign bond yield spreads. In fact, substantial and protracted cumulated inflation differentials (i) derive from a failure of the EMU to work as an OCA and hence to absorb and balance out asymmetric shocks and (ii) lead to a divergence of real exchange rates and competitiveness. Therefore, a statistical significance associated to cumulated inflation differentials can be interpreted as an indication that the economies in the sample do not constitute an OCA. Using this criterion, we are able to group the countries in our sample into peripheral EMU economies (countries that do not pass the OCA test) and core EMU economies (countries that do pass the test) and this allows us to establish that the above results are driven by peripheral EMU countries. In particular, within core EMU, (i) debt-to-GDP differentials cease to be the main long-run drivers of sovereign bond yield spreads; and (ii) the same increase in the debt-to-GDP differential leads to a dramatically smaller increase in the sovereign spread. Such findings are noteworthy because they highlight that investors closely monitor and severely punish the deterioration of debt positions of those economies exhibiting significant competitiveness gaps. This suggests that policy-makers willing to reduce the burden of high sovereign spreads in the EMU should embrace structural policies aiming at a higher level of coordination of prices and wages across the union, besides well-designed consolidations programs.