Risk premium as an economic policy objective: the Spanish case

Abstract

[Abstract]: This paper tries to analyse to what extent the public debt yield spread of German and Spanish sovereign bonds is related with the Spanish economic fundamentals. An analysis of different Spanish economic variables (public debt/GDP, private debt/GDP, inflation rate, unemployment rate and borrowing capacity) from 1990 to 2012 is done previous to a cointegration analysis. Results do not allow us to confirm strongly the long term relationship between public debt yield spread and the referred economic variables as a whole null hypothesis. In this sense, there is not enough evidence to show that premium risk evolution is determined by Spanish economic fundamentals progression in the long term, and thus a speculative component might be considered as a determinant. Therefore, the referred spread role as an economic policy objective should be relativized since it cannot be proved that tackling the analysed economic variables could reduce the spread significantly.