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We study the sovereign yield spreads determinants in transition -Central and Eastern Europe (CEE) and Caucasus and Central Asia (CCA) --countries and try to provide an answer to the key question: was the narrowing of the spreads and their compression a result of improvement of CEECCA countries sovereign"s macroeconomic policy (implemented in early to mid 2000s), or was it due to global excess liquidity provision? If better domestic macroeconomic policy efforts and solid reforms implemented in this period have led to: i) improvement in sovereign debt management e.g., by increasing the average debt portfolio duration and reducing the stock of FOREX debt; ii) development of domestic financial markets with enlargement of the investor"s base and enhancement of the risk management techniques; iii) continuing financial liberalization; iv) sustainable fiscal adjustment, reserve accumulation and price stability; and v) adoption of the most conductive to prosperity institutional structure, then it would be expected that any tighter monetary policy environment in the developed economies should have only a tiny effect on spreads.The models are estimated on an individual basis --country by country --using a framework allowing for fractionally integrated variables (ARDL) as well as, by utilising panel data (cross-sectional-time-series) estimation whenever data availability allows.We utilise daily data over the period 2006-2012 and quarterly data over the period 2002-2011. These are the periods for which meaningful comparable data are available for Bulgaria, Croatia, Hungary, Kazakhstan, Poland, Russia, Serbia, and Ukraine (in various combinations).We are careful not to attempt to split the sample into (say two) potential segments for comparison of "normal" versus "crises" period estimates (as customary) as since 2002 / 2003 the transition economies have started to experience the powerful financial effect generated by the excess global liquidity, i.e., the entire period under consideration is constituted by two phases characterised by: i) excess liquidity (2002)(2003)(2004)(2005)(2006)(2007)(2008); and, ii) the Great Depression Mark II (2008 -to present).

The Balassa and Samuelson hypothesis --BS -- (Balassa, 1964, Samuelson, 1964, which natural point of departure is the Salter-Swan (dependent economy) model is analysed. It offers general theoretical justification of the long run trends in real exchange rates in relation to productivities and prices. This is to say, that taking into consideration the important real world feature of having both tradable and nontradable goods BS states that if a given country's productivity in producing tradable goods compared to its productivity in making non-tradable goods and services rises more rapidly than in a (certain) foreign country, then the home country real exchange rate will experience appreciation. Thus if productivity of factors of production grows faster in the home country tradable sector, then relative price in the nontradable sector should rise. Furthermore, we provide supporting illustrative evidence by empirically assessing the BS effect for Azerbaijan.