Market Discipline, Financial Integration and Fiscal Rules: What Drives Spreads in the Euro Area Government Bond Market?

By Simone Manganelli, Guido Wolswijk. Social Science Research Network, 2007

112 citations recorded by the source corpus.

This paper studies the determinants of interest rate spreads of euro area 10 year government bonds against the benchmark, the German bund, after the introduction of the euro. In particular, it pays attention to the question whether market discipline is advanced or obstructed by financial integration and by fiscal rules like the Stability and Growth Pact. We first argue that financial integration – by improving market efficiency – is instrumental for markets to exert their disciplinary role. Next, we discuss the relationships between market discipline and fiscal rules, arguing that these in principle may reinforce each other. Finally, we provide strong empirical evidence that spreads depend on the ratings of the underlying bond and to a large extent are driven by the level of short-term interest rates. JEL Classification: G12, G18, C23

View Paper: https://www.semanticscholar.org/paper/db917c002378e9f3ba9cb38d95d7bed7b2ccf0f3

Citations in the corpus

• Sovereign Spreads: Global Risk Aversion, Contagion or Fundamentals? (2010, unknown): “THE SPILLOVER COEFFICIENT (SC) ............................................................................9”
• The Pricing of Sovereign Risk and Contagion During the European Sovereign Debt Crisis (2013, unknown): “Manganelli and Wolswijk (2007) assess the determinants of euro area sovereign spreads after the introduction of the euro.”
• Convergence and Anchoring of Yield Curves in the Euro Area (2008, unknown): “…Baele et al., a number of studies have found significant differences in yield spreads across euro area countries even after EMU due either to differences in credit risk (Codogno et al. 2003, Manganelli and Wolswijk 2007) or liquidity (Gómez-Puig 2006, Jankowitsch et al. 2006, Favero et al. 2008).”
• Determinants of sovereign yield spreads in the Eurozone: A Bayesian approach (2012, unknown): “Whereas these papers consider spreads observed for single bond issues, others, such as Codogno et al. (2003), Lemmen and Goodhart (1999), and Manganelli and Wolswijk (2007), use data for a benchmark curve that is related to a fixed maturity, usually a time to maturity of 10 years is considered.”