City Research Online

Abstract

This paper empirically investigates the transmission of systemic risk across the Euro Area by employing a Global VAR model. We find that a union aggregate systemic risk shock results in a sharp decline in output, with two thirds of the response to be attributed to cross-country spillovers. The results indicate that peripheral economies have a disproportionate importance in spreading systemic risk compared to core countries. Then, we incorporate high-frequency monetary surprises into the model and we find evidence of the risk-taking channel of monetary policy. However, the relationship is reversed in the period of the ZLB, when expansionary shocks mitigate systemic risk, since they reduce market uncertainty and funding risk. Cross-country spillovers account for a significant fraction (17.4%) of systemic risk responses’ variation. We also show that near term guidance reduces systemic risk, whereas the initiation of the QE program has the opposite effect. Finally, the effectiveness of monetary policy exhibits significant asymmetries, with core countries driving the union response.

Publication Type:	Article
Additional Information:	This version of the article has been accepted for publication, after peer review and is subject to Springer Nature’s AM terms of use, but is not the Version of Record and does not reflect post-acceptance improvements, or any corrections. The Version of Record is available online at: https://doi.org/10.1007/s11079-022-09707-0
Publisher Keywords:	Systemic risk ; Global VAR ; Euro Area ; Unconventional Monetary Policy
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HJ Public Finance J Political Science > JN Political institutions (Europe)
Departments:	Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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