"Loose lips sinking markets?": the impact of political communication on sovereign bond spreads

Marion Salines, Gabriel Glöckler, Thomas Gade and Steffen Strodthoff

No 150, Occasional Paper Series from European Central Bank

Abstract: Taking a cue from the assertion that "loose lips sink markets" (Carmassi and Micossi, 2010), this paper investigates to what extent and why political communication has had an impact on the sovereign bond spreads of selected euro area countries over the German Bund. Drawing on 25,000 news media releases between January 2009 and October 2011, it empirically compares political communication across various political actors at the supranational and national levels in the euro area. It finds empirical evidence that, in the short term, certain types of political communication have a quantifiable effect on sovereign bond spreads. This effect can be positive or negative depending on the type of communication, possibly fuelling self-reinforcing feedback loops between markets and policy actions. Subsequently, this paper explores possible reasons for this observed phenomenon. It analyses the specific economic, political and institutional context in which political communication works in Europe and finds that the potential for miscommunication is structurally higher in the euro area than in other nation-based currency areas. Finally, the paper identifies avenues to make communication policy more effective and puts forward possible measures to mitigate the risks of miscommunication. JEL Classification: C22, D70, E43, E44, E61, E62, G12, G14, F50

Keywords: political communication; public finances; sovereign bond spreads; sovereign debt crisis (search for similar items in EconPapers)
Date: 2013-07
Note: 1720042
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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