We empirically investigate the determinants of sovereign spreads in the euro area. We find that the relationship is nonlinear, with a break in mid-2007. The impact of fiscal conditions on sovereign risk has strengthened. Increased financial volatility has widened the set of macro determinants of spreads. Nonlinear effects arise because of interaction between fiscal and financial variables.
Fiscal and financial determinants of Eurozone sovereign spreads
CAGGIANO, GIOVANNI;GRECO, LUCIANO GIOVANNI
2012
Abstract
We empirically investigate the determinants of sovereign spreads in the euro area. We find that the relationship is nonlinear, with a break in mid-2007. The impact of fiscal conditions on sovereign risk has strengthened. Increased financial volatility has widened the set of macro determinants of spreads. Nonlinear effects arise because of interaction between fiscal and financial variables.
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