Contagion across Eurozone's sovereign spreads and the Core-Periphery divide

Elisabetta Croci Angelini, Francesco Farina and Enzo Valentini
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Francesco Farina: University of Siena

No 45-2014, Working Papers from Macerata University, Department of Studies on Economic Development (DiSSE)

Abstract: This paper investigates the causes of disproportionate increases of sovereign yields with respect to the interest rate on the 10 years German Bund within the Eurozone. Empirical evidence drawn from the BIS dataset on banks' portfolios shows that rapid financial integration, following the launch of the monetary union, resulted in excess exposure of Core countries' banks in the Peripheral countries' financial assets. In order to endogenize the possibility of contagion effects, we conduct econometric estimates through a GVAR model, where each country's spread depends upon all Eurozone countries' spreads. Results show that after the burst of the financial crisis the Core countries' sovereign yields are essentially determined by the international risk aversion, whereas the spreads of Peripheral countries mainly depend on fundamentals, namely the public debt/GDP ratio and the REER values with respect to the Eurozone average. Macroeconomic failures in public finances and competitiveness seem to originate the exceptional increases in sovereign spreads of the Periphery, through a contagion effect which is limited to this group of Eurozone countries.

Keywords: Monetary union; International risk aversion; Sovereign bond spreads; Contagion (search for similar items in EconPapers)
JEL-codes: E42 F36 F42 G12 H63 (search for similar items in EconPapers)
Date: 2014-12, Revised 2015-01
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (9)

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Journal Article: Contagion across Eurozone’s sovereign spreads and the Core-Periphery divide (2016)
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