Soft budget constraints, European Central Banking and the financial crisis

Jannik Jäger and Theocharis Grigoriadis

No 2016/7, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: During the European financial crisis, the European Central Bank implemented a series of unconventional monetary policy measures. We argue that these unconventional monetary policy measures created soft budget constraints for the Eurozone countries by lowering their bond yield spreads. This hypothesis is tested using pooled OLS estimations and two different datasets: monetary policy event dummies and the purchase volumes of the Securities Markets Programme (SMP). We find significantly negative effects on bond yield spreads for both datasets, leading us to accept the hypothesis. The results are confirmed by robustness checks that directly estimate the effect of unconventional monetary policy on central government debt.

Keywords: soft budget constraints; bond yield spreads; monetary policy events; securities markets programme; European Central Bank (search for similar items in EconPapers)
JEL-codes: F34 F37 F42 P17 P51 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:20167

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