Working Paper: CEPR ID: DP17533
Authors: Sylvester C.W. Eijffinger; Mary Pieterse-Bloem
Abstract: We aim to determine Eurozone sovereign bond spreads and the ECB’s influence through a generalised model. In a multidimensional structure we regress an extensive set of variables for different factors on spreads, and empirically identify the best-fit through a general-to-specific process. We cannot identify a satisfactory specification with macro fundamental factors. Different regimes in the spreads’ structure explains this. Spreads are after 2012/2013 well explained by market risk-based factors, and our specification is robust for earlier periods. When we add EMU-specific factors, it is shown that Target2 balances reduce spread as they increase convertibility risk costs until 2012/2013, and that the ECB’s asset purchases subsequently reduce spreads, especially in the periphery. The break between these two periods coincides with an alteration of policy over two sets of Presidencies: Duisenberg – Trichet in the first period and Draghi-Lagarde in the second. Either set has interpreted and implemented the mandate of the central bank in a very different way. While under Duisenberg-Trichet the ECB has only acted in the Eurozone money market, under Draghi-Lagarde the central bank has increasingly been involved in the capital market.
Keywords: conventional and unconventional monetary policy; economic and monetary union; european central bank; european financial markets; european sovereign bond spreads
JEL Codes: E43; E44; E58; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB's asset purchases (E52) | bond spreads (G12) |
| TARGET2 balances (F32) | bond spreads (G12) |
| macro fundamental factors (E66) | bond spreads (G12) |
| market risk-based factors (G41) | bond spreads (G12) |
| ECB's shift from conventional to unconventional monetary policy (E52) | structure of bond spreads (G12) |