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Euro Bonds: In Search of Financial Spillovers

Euro Bonds: In Search of Financial Spillovers. Pierre L. Siklos, WLU & VRCME. Negative Spillovers. Should the state of fiscal policy (deficit & debt) have an impact on government bond yields? The European experience seems either puzzling – Italy and others are not Germany (!)

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Euro Bonds: In Search of Financial Spillovers

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  1. Euro Bonds: In Search of Financial Spillovers Pierre L. Siklos, WLU & VRCME

  2. Negative Spillovers • Should the state of fiscal policy (deficit & debt) have an impact on government bond yields? • The European experience seems either puzzling – Italy and others are not Germany (!) • The European market is one big pool of debt and so small differences ought to persist

  3. Negative Spillovers • Has the SGP played a significant role bond yield developments? What about EMU? • ECB is autonomous and cannot bail-out bad fiscal policies • The SGP has been retooled but hangs on as a disciplining device of sorts

  4. POINTS NOT MADE • Gross public debt rise is an international phenomenon • Bond yields have, until recently, trended down • There is a perceived lack of urgency in dealing with budgetary imbalances

  5. Negative Spillovers: theoretical aspects • 3 institutional pre-conditions: • ECB: strong • SGB: wobbly • No bail-out clause: folk tale? Reality? • Why worry? Can Investors discriminate among different issuers? • Yes: No problem • NO: Contagion or other effects

  6. Negative Spillovers: theoretical aspects • No shortage of hypotheses • Ricardian equivalence • Mundell-Fleming • New Open Economy Macro • Stock vs Flow • Bottom Line: Empirical evidence suggests contradiction and confusion

  7. Negative Spillovers: theoretical aspects • How then to proceed? • Paper: take disparate views and then considers case studies followed by some econometric evidence • Preferred: Set out a kind of common framework that is then testable (e.g., resulting in an SVAR with stock-flow distinction)

  8. From Claeys (2005)

  9. The Case Studies • Germany around reunification (8 pages) • No negative spillovers • Italy’s early 1990s fiscal crisis (3 pages) • Markets can dicriminate

  10. The Case Studies: a closer look • Germany around reunification • Is it relevant? • Is there a reunification Risk Premium? • No explicit role given to what Buba did/said • European business cycle plays secondary role

  11. Some Business Cycles

  12. The Case Studies: a closer look • Germany around reunification • Is it relevant? • Is there a reunification Risk Premium? • No explicit role given to what Buba did/said • European business cycle plays secondary role • Bottom Line: I am still not clear how this is relevant to the main hypothesis of the paper

  13. The Case Studies: a closer look • Italy’s fiscal crisis • Is this relevant? • What about the Exchange rate? Co-mingled with effect we are looking for • Bottom line: Not a true test of what we are looking for

  14. EU’s Track Record

  15. Econometric Evidence • Various bits and pieces of evidence presented. Does it add up? MAYBE but there are many unanswered questions • Why not asymmetry? • Why only levels and not volatility spillovers? • Why so little care in the construction of real yields? • Why the talk about CI when its ignored in the estimation? • Why no attempt at estimating some kind of risk premium?

  16. Econometric Evidence Cont’d • Various bits and pieces of evidence presented. Does it add up? MAYBE but there are many unanswered questions • Granger causality is a problem in CI VARs (Toda and Phillips) • Why not an encompassing approach? • Is Switzerland the right benchmark? • Common EU vs individual country effects need to be clearly delineated • What about the reserve accumulation explanation? (IMF 2006) • What about EU vs New EU members?

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