Confidence Swings and Sovereign Risk Dynamics
This study investigates the time-varying determinants of Italian sovereign risk using a Markov-switching structural vector autoregression, estimated on 1990–2018 monthly data. Sign restrictions are used for identification, and allow macroeconomic fundamentals and confidence-related factors to be characterized as separate and regime-dependent drivers of risk. We show that the latter becomes relevant during a crisis regime, when a negative confidence shock triggers demand-like macroeconomic disruptions, and sharp increases in sovereign spreads.