ECB policy and Eurozone fragility: Was De Grauwe right?

Orkun Saka, Ana-Maria Fuertes and Elena Kalotychou

Journal of International Money and Finance, 2015, vol. 54, issue C, 168-185

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.

Keywords: Sovereign debt; Eurozone fragility; Self-fulfilling dynamics; European Central Bank; Outright Monetary Transactions (search for similar items in EconPapers)
JEL-codes: C52 E44 F36 G15 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560615000480
Full text for ScienceDirect subscribers only

Related works:
Working Paper: ECB Policy and Eurozone Fragility: Was De Grauwe Right? (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:54:y:2015:i:c:p:168-185

DOI: 10.1016/j.jimonfin.2015.03.002

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().