ECB policy and Eurozone fragility: Was De Grauwe right?
Saka, O. ORCID: 0000-0002-1822-1309, Fuertes, A-M.
ORCID: 0000-0001-6468-9845 & Kalotychou, E. (2015).
ECB policy and Eurozone fragility: Was De Grauwe right?.
Journal of International Money and Finance, 54,
pp. 168-185.
doi: 10.1016/j.jimonfin.2015.03.002
Abstract
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 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, but only during the pre-announcement period. Altogether these findings support the fragility hypothesis and endorse the OMT program.
Publication Type: | Article |
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Additional Information: | © 2015, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/ |
Publisher Keywords: | Sovereign debt; Eurozone fragility; Self-fulfilling dynamics; European Central Bank; Outright Monetary Transactions |
Subjects: | H Social Sciences > HG Finance J Political Science > JZ International relations |
Departments: | Bayes Business School > Finance |
SWORD Depositor: |
Available under License : See the attached licence file.
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