Long-term Government Bond Yields and Macroeconomic Variables

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: This article investigates the relationship between the economic influences a country has and how the market has observed by 10-year government bond yields through a set of macroeconomic variables. It examines a set of OECD countries between 1980 and 2013 dividing them into two groups namely the G7 group and small countries, even though the specific effect of the USA is investigated as well. The Panel data regressions are estimated with OLS and with GMM. We find that there are distinguishable differences between larger and smaller countries and evidence for USA having a special position in the world economy, although the results are somewhat distorted by the latest financial crisis. Smaller countries are harsher judged on their unemployment rate and budget balance whereas larger countries can get boosts from increased net lending. USA has a higher correlation between its GDP growth and yield and has apart from the other large countries also a positive effect of running a deficit in the current account. The effect from government debt does not seem to be much different between the groups but is slightly stronger among larger countries.

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