The instability of the market for government bonds in the EMU

Joern Kleinert ()
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Joern Kleinert: University of Graz, Austria

No 2023-02, Graz Economics Papers from University of Graz, Department of Economics

Abstract: The introduction of the Transmission Protection Instrument is the latest evidence, that the EMU is confronted with unstable markets for government bonds. Based on a parsimonious model of the government bond market, I argue, that this results from the introduction of the euro, which has homogenized government bonds. Now, several easily substitutable bonds are traded at the same time. Investors are sorted according to return and risk instead of along currencies. This self-selection, however, creates instability in crises. Price convergence and sorting characterized the first decade of the euro, instability the second.

Keywords: Financial markets; assets differentiation; interest rates. (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 (search for similar items in EconPapers)
Date: 2023-02
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