Identifying financial fragmentation: do sovereign spreads in the EMU reflect differences in fundamentals?

Jan Kakes and Jan Willem End

Working Papers from DNB

Abstract: We present a metric for financial fragmentation in the Economic and Monetary Union (EMU), based on the higher moments of the distribution of sovereign spreads relative to macro-financial fundamentals. We apply fixed parameter and rolling regressions to allow for time variation in this relationship, while controlling for market sentiment. The metric shows that the observed moments of the spread distribution occasionally overshot the fundamentals-based benchmark until 2018. Since then, the moments of observed spreads have generally not exceeded the fundamentals-based moments, also not in the most recent period, despite the increase in interest rates. The latter may be attributed to backstop facilities of the European Central Bank (ECB), such as the Transmission Protection Instrument (TPI).

Keywords: Monetary policy; Quantitative Easing; Sovereign risk; Sovereign spreads (search for similar items in EconPapers)
JEL-codes: E52 E58 G12 (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:778

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