Ricerc@Sapienza

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.

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.

We estimate different MS-SBVARs with U.S. data from 1978 to 2015 and we adopt a final model with two variance regimes and two monetary policy regimes: The variance regimes capture periods of high or low uncertainty of the system. The monetary policy regimes are hawkish or dovish. The hawkish regime captures mainly the Volcker mandate, in which the conduct of monetary policy followed the dynamics of inflation, whereas the dovish regime is active under Greenspan and Bernanke, when the central banker focused mainly on real activity.