Dispelling the shadow of fiscal dominance? Fiscal and monetary announcement effects for euro area sovereign spreads in the corona pandemic

Annika Havlik, Friedrich Heinemann, Samuel Helbig and Justus Nover

Journal of International Money and Finance, 2022, vol. 122, issue C

Abstract: We use event study regressions to compare the impact of monetary versus fiscal policy announcements on euro area government bond spreads in the unfolding Covid-19 pandemic. Throughout our specifications and robustness checks, we detect larger effects for monetary than for fiscal announcements. Among monetary policy instruments, the PEPP has the largest spread compressing effects. Comparing the announcement effects for fiscal crisis tools, Next Generation EU shows significant results in contrast to news on pure loan instruments. The relaxation of European fiscal rules through the activation of the emergency-escape clause under the Stability and Growth Pact is associated with rising spreads. We conclude that the stability of euro area bond markets in the presence of a severe solvency shock depends to a large extent on the Eurosystem’s unconstrained sovereign bond purchases. Our results suggest that fiscal support can play a stabilizing role if it includes, like Next Generation EU, a significant transfer component.

Keywords: Event analysis; Next Generation EU; PEPP; Stability and Growth Pact (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Working Paper: Dispelling the shadow of fiscal dominance? Fiscal and monetary announcement effects for euro area sovereign spreads in the corona pandemic (2021)
Working Paper: Dispelling the shadow of fiscal dominance? Fiscal and monetary announcement effects for euro area sovereign spreads in the Corona pandemic (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:122:y:2022:i:c:s0261560621002291

DOI: 10.1016/j.jimonfin.2021.102578

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