Eurozone government bond spreads: A tale of different ECB policy regimes

Sylvester C.W. Eijffinger and Mary Pieterse-Bloem

Journal of International Money and Finance, 2023, vol. 139, issue C

Abstract: We aim to determine Eurozone sovereign bond spreads and the ECB’s influence through a generalised model. In a multidimensional structure we regress an extensive set of variables for different factors on spreads, and empirically identify the best-fit through a general-to-specific process. We cannot identify a satisfactory specification with macro fundamental factors. Different regimes in the spreads’ structure explains this. Spreads are after 2012/2013 well explained by market risk-based factors, and our specification is robust for earlier periods. When we add EMU-specific factors, it is shown that Target2 balances reduce spread as they increase convertibility risk costs until 2012/2013, and that the ECB’s asset purchases subsequently reduce spreads, especially in the periphery. The break between these two periods coincides with an alteration of policy over two sets of Presidencies: Duisenberg – Trichet in the first period and Draghi-Lagarde in the second. Either set has interpreted and implemented the mandate of the central bank in a very different way. While under Duisenberg-Trichet the ECB has only acted in the Eurozone money market, under Draghi-Lagarde the central bank has increasingly been involved in the capital market.

Keywords: Conventional and unconventional monetary policy; Economic and Monetary Union; European Central Bank; European financial markets and European sovereign bond spreads (search for similar items in EconPapers)
JEL-codes: E43 E44 E58 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:139:y:2023:i:c:s0261560623001663

DOI: 10.1016/j.jimonfin.2023.102965

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