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We would like to thank Luc Everaert and Abdelhak Senhadji for helpful discussions and guidance. We would also like to thank Ali Abbas, Ruchir Agarwal, Jochen Andritzky, Sergei Antoshin, Andrij Blokhin, Francesco Columba, Heiko Hesse, Bradley Jones, Luc Laeven, Prachi Mishra, Sergejs Saksonovs, Tahsin Saadi Sedik, and Anita Tuladhar for helpful comments. Graham Colin-Jones provided excellent editorial assistance. The usual disclaimer applies.
The importance of the investor base for the sustainability of public debt in market access countries has been emphasized in the recently revised IMF staff guidance note on debt sustainability (IMF, 2013b).
Following the 2013 Article IV report for the euro area, periphery countries include Greece, Ireland, Italy, Portugal, and Spain.
For example, Bernanke (2013) argues that the global economic and financial stresses of recent years—triggered by the financial crisis and then by the problems in the euro area—may have elevated the safe-haven demand for Treasury securities, pushing down Treasury yields and implying a lower, or even negative, term premium. Krishnamurthy and Vissing-Jorgensen (2012) estimate that U.S. Treasury bond yields may have been reduced by 73 basis points, on average, from 1926 to 2008 given their extreme safety and liquidity. Hördahl, Tristani, and Vestin (2006) show that safe-haven demand has decreased yields also in the core euro area countries. Kaminska, Vayanos, and Zinna (2011) provide a structural model of the term structure of interest rates that is consistent with no arbitrage, but allows for market segmentation between arbitrageurs and preferred-habitat investors with preferences for specific maturities.
We use the 2-year rates as an indicator of not just current, but also expected, policy rates in the near term.
Switzerland also provides government debt figures consistent with the definition of Maastricht debt. The data for Switzerland are on an annual basis, so quarterly figures are interpolated.
Consensus Forecast provides projections for the current year and the following year. To construct a one-year ahead projection for each quarter, we took the weighted average of these two projections, where the weights were determined as follows: ¾ and ¼, respectively, for the first quarter; ½ and ½ for the second quarter, and so forth.
The autocorrelation coefficient of the foreign investor base variable is 0.995 for the first lag and gradually declines to 0.915 for the tenth lag.
More formally, the within transformation of variable Xit can be written as (Xit – Xi.), where Xi. is the average for country i. In Figure 2, we have also added sample means (X..) of the FIB and sovereign bond yields to their respective within transformations in order to move the scatter plot away from the axis origin.
We have checked variables for stationarity. Although individual/country-specific ADF tests suggest that some variables are I(1), co-integration tests using Johansen procedure confirm co-integration for those variables.
Moreover, several studies, such as Acharya and Steffen (2013), find that increasing “home bias”—greater exposure of domestic banks to sovereign bonds—after the European banking crisis may have played a role in pushing down bond yields in periphery countries. All else equal, that would suggest that the impact of foreign outflows from euro area periphery countries on bond yields may have been even higher than suggested in Table 4.
The smoothing is performed using MA (4,1,4) representation: 1/9*(xt-4+xt-3+xt-2+xt-1+xt+xt+1+xt+2+xt+3+xt+4), where xt is the macro and fiscal variable of interest (real GDP growth, inflation, and debt-to-GDP ratio).
The results are robust to the inclusion of the crisis dummy and VIX variables one at a time. We also included an interaction term between the crisis dummy and domestic official debt share variable to address the issue that central bank bond purchases may have been more powerful during the crisis. The results for the FIB remain robust to these changes in the model specification.
The index of economic policy uncertainty refers to uncertainty surrounding economic policies in the United States and euro area and is a weighted average of three indicators: the frequency with which terms like “economic policy” and “uncertainty” appear together in the media; the number of tax provisions that will expire in coming years; and the dispersion of forecasts of future government outlays and inflation.
This causality test is rejected consistently for these countries using lag periods up to 3 quarters. The test is rejected for Spain (3 lags), Switzerland (3 lags), and Sweden (1 and 2 lags) in only some specifications.
Warnock and Warnock (2009) find that foreign flows into the U.S. Treasury market in the amount of 1 percent of GDP are associated with a 19 basis point reduction in long-term rates. This would correspond to a 2.7 percentage point increase in foreign ownership of U.S. Treasuries, based on figures from 2005 when their study ended.