Sentiments in sovereign risk crises: a set-identified Markov-switching approach
Since the 2011-12 sovereign debt crisis many euro-area countries have experienced economic slowdown and deflation, in a period with large government debt overhang. This scenario creates the conditions for financial market distress, with sovereign spreads surges and large fluctuations in agents' expectations. This article investigates the historical determinants of Italian sovereign risk, using a Markov-switching VAR on 1990-2018 data. It aims to identify the triggers of sovereign crises and study fundamental versus regime-dependent sentiment drivers.