The Risk Premium on Italian Government Debt, 1976-88

Abstract

The behavior of the yield differential between government and nongovernment bonds in Italy between 1976 and 1988 is considered. The trend increase of the differential in this period was significantly influenced by the deterioration of public finances, as reflected both by an increase in the supply of government paper relative to nongovernment paper and by a worsening of selected default-risk indicators. The effect of relative supply factors, in turn, was found to be statistically more robust and quantitatively more important than that of risk indicators in explaining movements in yield differentials.