The ECB's Pandemic Emergency Purchase Programme and Fiscal Policy: Synergies or Conflict?

Antonio Afonso and Jorge Braga Ferreira

No 2025/0378, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: We assess how countries’ fiscal policies during COVID-19 pandemic influenced the effects of the Pandemic Emergency Purchase Programme (PEPP) on sovereign bond Option-Adjusted Spreads. Using a cross-sectional regression model with country and time-fixed effects, we analyse a sample of 1,368 euro-denominated sovereign bonds issued between Q1:2018 and Q1:2022 in 19 Eurozone countries. We consider the PEPP net purchases by country, and the fiscal policy is measured through changes in debt-to-GDP ratio and net lending/borrowing as a percentage of GDP. The results indicate that PEPP’s effectiveness in reducing spreads was strongly conditional on fiscal conditions, and then fiscal fundamentals condition the effectiveness of ECB interventions. In high-debt countries, PEPP did not lower spreads, which suggests that fiscal concerns remained dominant. PEPP was more effective in low-debt countries, but its effects diminished as the level of debt increased, which suggest rising fiscal risks. Furthermore, eligibility status was more important in economies with low debt levels, where eligible bonds were seen as riskier assets. Finally, the results suggests that PEPP’s effectiveness was stronger for higher-rated bonds, longer-maturity bonds, and central government bonds, in fiscally sound countries.

Keywords: ECB; PEPP; unconventional monetary policy; fiscal policy; sovereign bond yields; COVID-19 pandemic. (search for similar items in EconPapers)
JEL-codes: C23 E52 E58 E62 G12 (search for similar items in EconPapers)
Date: 2025-05
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Working Paper: The ECB's Pandemic Emergency Purchase Programme and Fiscal Policy: Synergies or Conflict? (2025)
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