Which Countries Pay More or Less for Their Long Term Debt? A CART Approach.

Abstract

The objective of this paper is to classify a group of EMU countries according to the main determinants of long-term sovereign bond yields. We apply the Classication and Regression Tree method (CART). According to the findings, countries with lower inflation, a lower debt to GDP ratio, a lower average income tax rate, higher public debt maturity and higher IPI growth are placed in classification groups that have lower bond yields. These results confirm the hypothesis that countries with better macroeconomic and fiscal indicators have lower sovereign bond yields.