The impact of fiscal positions on government bond yields in CEE countries

- Government debt and primary deficit have a positive impact on long-term government bond yields in 10 Central and Eastern European countries.
- A one percentage point increase in the stock of government debt is associated with an increase in government bond yields of 2.7-4 basis points.
- A one percentage point increase in the primary deficit/GDP ratio is associated with a rise in government bond yields of 12.9-24.3 basis points.
- The relationship between government debt and bond yields is non-linear and the threshold is significantly lower than in advanced economies.

This paper investigates the influence of government debt and primary balance on long-term government bond yields in 10 Central and Eastern European (CEE) countries in the period 2000-2013. The results indicate that a one percentage point increase in the stock of government debt is associated with an increase in government bond yields of 2.7-4 basis points, while a one percentage point increase in the primary deficit to GDP ratio is associated with an increase in government bond yields of 12.9-24.3 basis points. We also find evidence of non-linearities in the debt-interest rate relationship, whereby the threshold after which the impact of debt turns from negative to positive is significantly lower than in advanced economies.