Stabilising market expectations through a market tool: a proposal for an enhanced TPI

Massimo Amato (), Everardo Belloni (), Carlo A. Favero (), Lucio Gobbi () and Francesco Saraceno ()
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Massimo Amato: Bocconi University
Everardo Belloni: Polytechnic of Milan
Carlo A. Favero: Bocconi University and CEPR
Lucio Gobbi: University of Trento
Francesco Saraceno: OFCE-SciencesPo

Economia Politica: Journal of Analytical and Institutional Economics, 2024, vol. 41, issue 2, No 12, 597-615

Abstract: Abstract This paper puts forward a proposal to complete the ECB Transmission Protection Instrument (TPI) with the aim of making it more effective in anchoring the yields of European sovereign debts to Member States’ fundamentals. We use a model in which yields fluctuate within bands, which we specify following two alternative approaches: stochastic and deterministic. The resulting fluctuation's interval represents the range of yields that can be seen as justified by Member States’ fundamentals; yields outside the band would instead trigger the ECB intervention as foreseen by the TPI. The proposal minimizes the risk of moral hazard, as the fluctuation bands vary as each country's creditworthiness changes. Moreover, the proposal is directly implementable with existing Treaties.

Keywords: TPI; European debt agency; Safe asset; Eurobonds; Public debt; Financial stability (search for similar items in EconPapers)
JEL-codes: G2 G28 H63 H81 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s40888-023-00302-1

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