ECB policy and Eurozone fragility: was De Grauwe right?

Saka, Orkun, Fuertes, Ana-Maria and Kalotychou, Elena (2015) ECB policy and Eurozone fragility: was De Grauwe right? Journal of International Money and Finance, 54. pp. 168-185. ISSN 0261-5606

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Paul De Grauwe’s Eurozone fragility hypothesis states that sovereign debt markets in a monetary union without a lender-of-last-resort are vulnerable to a self-fulfilling dynamics fuelled by pessimistic investor sentiment that can trigger default. We test this contention by applying an eclectic methodology to a two-year window around Mario Draghi’s “whatever-it-takes” pledge that can be understood as the implicit announcement of the Outright Monetary Transactions (OMT) program. A principal components analysis reveals that the perceived commonality in default risk among peripheral and core Eurozone sovereigns increased after the announcement. An event study reveals significant pre-announcement news transmission from Spain to Italy, France, Belgium and Austria that clearly dissipates post-announcement. Country-specific regressions of CDS spreads on systematic risk factors reveal frequent days of large adverse shocks affecting simultaneously those five Eurozone countries during the pre-announcement period. Altogether these findings support the fragility hypothesis and endorse the OMT program.

Item Type: Article
Keywords: Sovereign debt; Eurozone fragility; Self-fulfilling dynamics; European Central Bank; Outright Monetary Transactions
Schools and Departments: University of Sussex Business School > Business and Management
University of Sussex Business School > Economics
Subjects: H Social Sciences > HG Finance
H Social Sciences > HG Finance > HG0201 Money
H Social Sciences > HG Finance > HG3691 Credit. Debt. Loans
H Social Sciences > HG Finance > HG3810 Foreign exchange. International finance. International monetary system
H Social Sciences > HG Finance > HG4501 Investment, capital formation, speculation > HG4701 Government securities. Industrial securities. Venture capital
Depositing User: Orkun Saka
Date Deposited: 26 Apr 2019 12:03
Last Modified: 01 Jul 2019 16:00

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