Department of Economics and Business Economics

The Walking Debt Crisis

Research output: ResearchWorking paper

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  • rp17_06

    Final published version, 811 KB, PDF-document

  • Tobias Basse
    Tobias BasseNorddeutsche Landesbank GirozentraleGermany
  • Robinson Kruse
    Robinson Kruse
  • Christoph Wegener
    Christoph WegenerIpag Business School and Center for Risk and InsuranceFrance
This article sheds light on the question whether arising sovereign credit risk in the EMU has been triggered by the US subprime crunch. By adapting recent econometric methodologies suggested in the related field of speculative bubbles, we find clear evidence for fast diverging (and even explosive) behavior of EMU government bond yields of peripheral countries relative to Germany during the financial and the European debt crisis. This might be caused by flight-to-quality effects to German government bonds coincident with the collapse of Lehman Brothers and by a loss of confidence in the fiscal stability of Greece, Ireland, Italy, Portugal and Spain during the European debt crisis. First, we find compelling evidence for bubbles in the Dow Jones Equity Real Estate Investment Trust (REITs) index which serves as a weekly measure of economic activity in the North American real estate sector. Second, in our main analysis, we test whether the collapsing bubble in the housing market triggered the diverging government bond yields during two crisis regimes. Our findings indicate that this was the case in the course of the financial, but not during the EMU sovereign debt crisis. These results suggest that the severe fiscal

problems in peripheral countries are homemade rather than imported from the US.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages41
StatePublished - 31 Jan 2017
SeriesCREATES Research Papers
Number2017-06

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