Eurozone Government Bond Spreads: A Tale of Different ECB Policy Regimes

Sylvester Eijffinger and Mary Pieterse-Bloem

No 17533, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: 2022-09
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