Bond Convenience Yields in the Eurozone Currency Union

46 Pages Posted: 30 Mar 2021 Last revised: 15 Mar 2022

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance

Date Written: December 22, 2020

Abstract

We develop a fiscal theory of bond convenience yields in a currency union. As exchange rates and interest rates are set at the union level and cannot respond to country-level fiscal shocks, the intertemporal government budget constraint requires bond convenience yields and default spreads to adjust in response to country-level fiscal shocks. Empirically, we show that convenience yields explain a large fraction of the variation in Eurozone government bond yields, and higher convenience yields correspond to stronger fiscal conditions. As these convenience yields generate non-trivial seigniorage revenue from debt issuance, our estimate implies economically large fiscal burden on peripheral countries relative to central countries.

Keywords: bond pricing, fiscal policy, convenience yield, currency union

Suggested Citation

Jiang, Zhengyang and Lustig, Hanno N. and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., Bond Convenience Yields in the Eurozone Currency Union (December 22, 2020). Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3797321 or http://dx.doi.org/10.2139/ssrn.3797321

Zhengyang Jiang (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://sites.google.com/site/jayzedwye/

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Hanno N. Lustig

Stanford Graduate School of Business ( email )

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Stijn Van Nieuwerburgh

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Centre for Economic Policy Research (CEPR)

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Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://sites.google.com/view/mindyxiaolan

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