Abstract
1. Over the past 15 years, the dispersion of sovereign bond spreads across euro area countries has widened and narrowed several times, primarily due to spreads of some high debt countries. The distribution of 10-year sovereign bond spreads relative to the 10-year German bund initially widened around the global financial crisis, then surged during the euro area sovereign debt crisis. Since then, the distribution has narrowed, but remained wider and more volatile than pre-GFC. The widening and narrowing of the distribution are driven by spread movements of high debt countries, with the median spread generally low and much more stable, although appearing to respond to changes in monetary policy and risk perceptions.
Italy’s Sovereign Bond Spreads: Evolution and Drivers1
Dispersion of Sovereign Bond Spreads in the Euro Area
1. Over the past 15 years, the dispersion of sovereign bond spreads across euro area countries has widened and narrowed several times, primarily due to spreads of some high debt countries. The distribution of 10-year sovereign bond spreads relative to the 10-year German bund initially widened around the global financial crisis, then surged during the euro area sovereign debt crisis. Since then, the distribution has narrowed, but remained wider and more volatile than pre-GFC. The widening and narrowing of the distribution are driven by spread movements of high debt countries, with the median spread generally low and much more stable, although appearing to respond to changes in monetary policy and risk perceptions.
Euro Area: 10-year Government Bond Spreads, 2006–22
(Percent)
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Sources: Haver Analytics; and IMF staff estimates.Note: Dashed lines represent announcement dates of SMP, WIT/OMT. TLTRO, APP, PEPP and TPI respectively.Euro Area: 10-year Government Bond Spreads, 2006–22
(Percent)
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Sources: Haver Analytics; and IMF staff estimates.Note: Dashed lines represent announcement dates of SMP, WIT/OMT. TLTRO, APP, PEPP and TPI respectively.Euro Area: 10-year Government Bond Spreads, 2006–22
(Percent)
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Sources: Haver Analytics; and IMF staff estimates.Note: Dashed lines represent announcement dates of SMP, WIT/OMT. TLTRO, APP, PEPP and TPI respectively.2. Such spread divergence has important implications at the country and the euro area levels. Wider spreads imply higher government borrowing costs, thereby increasing the share of fiscal resources devoted to servicing public debt, especially in high-debt countries. In addition, diverging spreads—if they were to become disorderly—could impair the efficient transmission of monetary policy across the currency union and, in extreme circumstances, compromise financial stability of an individual country and/ or the entire monetary union.
Role of Macroeconomic Fundamentals vs. Monetary Policy: Literature and Gaps
3. Studies of Euro Area government bond spreads have identified macroeconomic fundamentals and, more recently, unconventional monetary policy as key determinants:2
GDP growth, public debt, and primary fiscal balance are found to be key factors influencing credit risk of sovereign borrowers, thereby affecting their borrowing costs.
Liquidity and external solvency risks—proxied by the size and depth of sovereign bond markets, external debt, and trade openness—also impact spreads, especially when financial conditions are tight
International risk factors and global/regional market sentiment—approximated by, e.g., the US and euro area stock market implied volatility (VIX and VSTOXX, respectively)—are found to affect sovereign bond spreads of euro area countries differently, with stronger impact for countries with high public debt and/or high exposure to international financial markets.
ECB asset purchase programs—both announcement and actual implementation—are found to compress sovereign bond spreads.
4. This paper extends the previous research in several important directions. First, the existing literature assumes a common impact of unconventional monetary policy on spreads of all euro area countries, which appears at odds with the data. Specifically, ECB purchases of government securities appear to be highly negatively correlated with spreads for high debt countries, but correlation is weak for other countries. In addition, monetary policy’s effects could vary with the stance of policy (tightening versus loosening) and with the type of intervention (signaling versus implementation, or conventional versus unconventional policy). Second, a more comprehensive measure of country-specific political risk—beyond the previous election cycle indicators—is used to measure government stability, political consensus, internal and external conflicts, corruption, and quality of bureaucracy (as measured by the political risk indicator in Figure 1). This broader measure likely better captures governments’ capacity or willingness to service debt.
Euro Area: Sovereign Bond Spreads, Political Risks, and ECB Asset Purchases
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Euro Area: Sovereign Bond Spreads, Political Risks, and ECB Asset Purchases
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Euro Area: Sovereign Bond Spreads, Political Risks, and ECB Asset Purchases
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Empirical Analysis: Potential Drivers of Euro Area Sovereign Bond Spreads
5. The determinants of government bond spreads for euro area countries at an annual frequency are estimated using a range of explanatory variables. The model uses a country-year dataset of annual data for the period 2000 to 2022 and encompassing 13 to 15 euro area countries.3 The explanatory variables are classified into four groups—macroeconomic fundamentals, common regional and global risks, country-specific policy and political uncertainty, and euro area-wide monetary policy. Annual data is used to focus on the persistent or slow-moving determinants of spreads that bear on debt service costs.4 The baseline panel regression is:
where i and t denote country and year; yi,t is the spreads on 10-year government bonds (vis-à-vis German government bonds); and Xi,t, Ri,t, Di,t, and Mi,t are vectors of explanatory variables, with the following details:5
Macroeconomic fundamental variables (Xi,t) include public debt to GDP ratio, primary fiscal balance (as a share of GDP), real GDP growth, inflation, and current account balance (as a share of GDP)—all of which from the IMF World Economic Outlook (WEO) database.
Common regional and global risk factors (Ri,t) are approximated by the composite indicators of systematic stress for the euro area and the US, obtained from the ECB (Hollo and others, 2012), and the implied volatilities of the US and European stock markets.
Domestic policy and political uncertainty variables (Di,t) comprise economic policy uncertainty indices for European countries (Baker and others, 2016); country-level world uncertainty index (Ahir and others, 2022); and the ICRG’s composite rating index of political risks.
Monetary policy variables (Mi,t) include (i) interest-rate based instruments (ECB policy interest rate, and the shadow interest rate and the difference between the shadow and neutral interest rates to measure the overall stance of monetary policy in a zero lower bound environment (Arena and others, 2020)); (ii) net purchases of country-specific government bonds under the ECB’s Asset Purchase Program (APP) and the Pandemic Emergency Purchase Program (PEPP) (as a share of a country’s public debt); (iii) two text-based indices measuring the ECB’s communication and/or commitment through signaling effects. This is done using a text-based index measuring the ECB’s commitment to act as a lender of last resort based on ECB press releases/speeches (a so-called whatever-it-takes index by Baumgärtner and Zahner, 2021) and a text-based policy intention to capture the ECB’s monetary policy stance (Picault and Renault, 2017).6
Persistence is captured by a first-order lag of spreads and the dynamic panel data (Arellano-Bover/Blundell-Bond) estimator is applied to address potential endogeneity problems related to both omitted variables and a correlation between the lagged dependent variable and the fixed effects (Nickell, 1981). Nonetheless, given that some potential estimation biases may remain, the direction of causality should be interpreted with caution.
6. Macroeconomic variables are found to be correlated with spreads in the expected direction. Countries with higher public debt tend to have wider bond spreads.7 The impacts of economic growth and inflation are found to be relatively large, with a one percentage point increase in growth associated with a narrower spread of 10 basis points (Figure 2).8, 9
Euro Area: Roles of Macroeconomic Fundamentals and Risks on Spreads
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Euro Area: Roles of Macroeconomic Fundamentals and Risks on Spreads
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Euro Area: Roles of Macroeconomic Fundamentals and Risks on Spreads
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
7. Regional risk and country-specific political uncertainty are positively associated with sovereign bond spreads. A unit increase in the EU systemic stress index—implying a doubling of the (composite) probability of financial system stress—is associated with a widening of countries’ spreads by 500 basis points, on average. On the other hand, a unit increase in the US systemic stress index would narrow euro area countries’ sovereign bond spreads by about 400–500 basis points, consistent with flight-to-safety. Higher country-specific political risk widens bond spreads—with a one standard deviation increase in the political risk index associated with a 130 basis point widening of spreads.
8. Monetary policy, both standard and unconventional, is found to be correlated with spreads. On average, tightening (loosening) of monetary policy by the ECB is associated with a widening (narrowing) of euro area sovereign bond spreads, with the magnitude and significance of the correlation differing depending on the type of monetary policy instrument (Figure 3):10
First, a higher ECB policy interest rate is found to be associated with an increase in bond spreads. Potentially owing to the prolonged period of at the zero lower bound (ZLB), the positive coefficient estimate on the ECB policy rate is not statistically significant. However, the result becomes statistically stronger once the ZLB environment is considered, with a percentage point increase in the shadow interest rate being associated with a widening of spreads by about 10–18 basis points (Figure 3). This result is robust to using the difference between the natural and shadow interest rate to measure the stance of monetary policy.
Second, net purchases of a country’s government securities by the ECB tend to narrow that country’s bond spread, but the impact diminishes as net purchases increase. A percentage point increase in net purchases as a share of that country’s outstanding government debt is associated with a narrowing of spreads by about 20 basis points lower on average. However, this average effect (per percentage point increase) is subject to diminishing returns—with the decline falling to about 15 basis points when once the amount purchased has risen to about 7 percentage points of outstanding government debt.
Third, ECB communications regarding its commitment to running an accommodative monetary policy coincide with a decline in euro area government bond spreads. The ECB’s perceived commitment to avoiding fragmentation risk (measured by the what-ever-it-takes index) also appears to help narrow bond spreads, but the estimated average impact is not statistically significant.
Euro Area: Roles of Monetary Policy on Spreads—Average Effects
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Euro Area: Roles of Monetary Policy on Spreads—Average Effects
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Euro Area: Roles of Monetary Policy on Spreads—Average Effects
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
9. In addition, monetary policy’s effect on spreads is found to be asymmetric, with larger impacts when policy is tightening. While such asymmetric effects are relatively small for interest rate-based instruments, they are sizable for the signaling effects of ECB communications (Figure 4). A stronger commitment by the ECB to mitigate fragmentation risk is more effective when monetary stance is tightening. Specifically, during a tightening period, ECB commitment to address fragmentation risk (measured by a one standard deviation increase in the WIT index) is associated with a narrowing of spreads by about 30 basis points. On the other hand, such commitments do not have a statistically significant impacts on spreads when the monetary policy stance is being loosened.
Euro Area: Roles of Monetary Policy on Spreads—Heterogeneous Effects
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Euro Area: Roles of Monetary Policy on Spreads—Heterogeneous Effects
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Euro Area: Roles of Monetary Policy on Spreads—Heterogeneous Effects
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
10. Asset purchases have materially larger effects on spreads of high-debt euro area countries. The interaction term of asset purchases and the outstanding debt ratio is negative and significant. This implies a larger decline in spreads for high-debt countries during quantitative easing, and a larger increase in spreads during quantitative tightening (Figure 4, bottom-right chart).11 For instance, a percentage point increase (decrease) in net asset purchases (as a share of public debt) is associated with an almost 20 basis point decline (increase) in bond spreads for countries with a public debt ratio of 150 percent, compared with a 12 basis point impact for those with a public debt ratio of 50 percent.
Implications for Italy
11. For Italy, public debt, unconventional monetary policy and political risk are key factors influencing sovereign bond spreads in recent years. Over the past five years, these factors explained nearly two-thirds of movements in Italy’s spreads. Spread widening from the high public debt-to-GDP ratio and episodic jumps in political risk were dampened by spread-compressing effects from asset purchases and commitments to mitigate fragmentation risk.
Italy: 10-Year Sovereign Spread – Actual vs Projected
(Percentage points)
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Source: IMF staff calculations.Italy: 10-Year Sovereign Spread – Actual vs Projected
(Percentage points)
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Source: IMF staff calculations.Italy: 10-Year Sovereign Spread – Actual vs Projected
(Percentage points)
Citation: IMF Staff Country Reports 2023, 274; 10.5089/9798400249280.002.A002
Source: IMF staff calculations.12. Looking ahead, quantitative tightening could be expected to weigh on Italy’s spreads more than for other euro area countries, but there is also scope to mitigate this effect. The impact of asset purchases on spreads reflects the share of Italy’s government bonds held by the ECB (relative to its total public debt) and the fact that a high level of public debt magnifies the impact of unwinding sovereign bond holdings. However, persistently lowering the public debt ratio could moderate the spread widening through the direct effect of debt on spreads and indirectly through debt’s interaction with euro area monetary conditions. Faster growth and reinforcing political stability could additionally help to contain spreads. The ECB’s commitment to support effective transmission of monetary policy could also help limit any asynchronous reaction of country-specific interest rates to changes in monetary conditions.
References
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Appendix I. Empirical Results
1. Empirical results are generally in line with expectations when allowing for a structural break and splitting data into different time periods. Given a potential structural break in the relationship between bond spreads and their determinants, the regressions are also run separately for periods prior to the unconventional monetary policy regime (2013) and after.1 While results are not entirely robust to specifications (likely due to a much shorter time dimension), they broadly point to similar relationships between spreads and factors in consideration with these factors being at play at different times. Macroeconomic fundamentals and standard monetary policy tools are found to have stronger associations with sovereign bond spreads during the early period. However, their role in determining sovereign bond spreads has declined over the past decade, in which market risks and unconventional monetary policy instruments have gain their importance.
Euro Area: Empirical Results—Average Effects
Euro Area: Empirical Results—Average Effects
| Spread on 10Y government bond (ppt; vis-a-vis DEU) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | (10) | |
| L.Spread on 10Y government bond (ppt; vis-a-vis DEU) | 0.39*** (0.03) | 0.37*** (0.03) | 0.26*** (0.03) | 0.23*** (0.04) | 0.25*** (0.03) | 0.23*** (0.03) | 0.20*** (0.03) | 0.25*** (0.03) | 0.19*** (0.04) | 0.19*** (0.03) |
| Public debt (percent of GDP) | 0.01*** (0.00) | 0.01*** (0.00) | 0.01** (0.00) | 0.01*** (0.00) | 0.01** (0.00) | 0.01*** (0.00) | 0.01*** (0.00) | 0.01** (0.00) | 0.01** (0.00) | 0.01*** (0.00) |
| GG primary balance (percent of GDP) | -0.04** (0.02) | -0.02 (0.02) | 0.02 (0.02) | 0.05** (0.02) | 0.02 (0.02) | 0.02 (0.02) | 0.01 (0.02) | 0.02 (0.02) | 0.03 (0.03) | 0.02 (0.02) |
| Real GDP growth (percent) | -0.10*** (0.02) | -0.08*** (0.02) | -0.09*** (0.02) | -0.09*** (0.02) | -0.09*** (0.02) | -0.10*** (0.02) | -0.08*** (0.02) | -0.10*** (0.02) | -0.11*** (0.03) | -0.08*** (0.02) |
| Inflation (percent) | 0.21*** (0.05) | 0.21*** (0.05) | 0.21*** (0.04) | 0.18*** (0.05) | 0.19*** (0.05) | 0.12** (0.05) | 0.15*** (0.04) | 0.20*** (0.04) | 0.16** (0.06) | 0.10** (0.05) |
| EU Systematic stress index | 7.11*** (0.86) | 5.36*** (0.86) | 5.35*** (0.86) | 5.59*** (0.93) | 6.77*** (0.95) | 6.28*** (0.85) | 5.72*** (0.95) | 4.53*** (1.04) | 7.08*** (0.94) | |
| US Systematic stress index | -6.67*** (1.10) | -4.41*** (1.10) | -4.15*** (1.10) | -4.72*** (1.22) | -6.23*** (1.23) | -5.28*** (1.08) | -4.94*** (1.23) | -3.14** (1.36) | -6.38*** (1.21) | |
| Political risk rating (high=high risk) | 1.39*** (0.20) | 1.52*** (0.20) | 1.42*** (0.20) | 1.50*** (0.20) | 1.47*** (0.19) | 1.48*** (0.22) | 2.12*** (0.31) | 1.53*** (0.21) | ||
| EA Monetary policy stance (+=tight) | 0.14*** (0.05) | |||||||||
| ECB policy rate | 0.06 (0.08) | |||||||||
| Shadow interest rate | 0.18*** (0.05) | 0.12** (0.06) | ||||||||
| PSPP+PEPP net purchase (percent of public debt) | -0.22*** (0.06) | -0.20*** (0.06) | ||||||||
| PSPP+PEPP net purchase (percent of public debt; square) | 0.01* (0.01) | 0.01* (0.01) | ||||||||
| Whatever it takes index (standardized) | -0.08 (0.09) | 0.01 (0.10) | ||||||||
| ECB communication (0–1=accommodative) | -1.53** (0.70) | |||||||||
| Constant | -0.35 (0.25) | -0.85*** (0.26) | -0.27 (0.26) | -0.25 (0.26) | -0.35 (0.29) | -0.42 (0.26) | -0.34 (0.25) | -0.22 (0.27) | 0.25 (0.51) | -0.43 (0.26) |
| Observations | 244 | 244 | 244 | 244 | 244 | 244 | 244 | 244 | 189 | 244 |
| Country | 13 | 13 | 13 | 13 | 13 | 13 | 13 | 13 | 13 | 13 |
Euro Area: Empirical Results—Average Effects
| Spread on 10Y government bond (ppt; vis-a-vis DEU) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | (10) | |
| L.Spread on 10Y government bond (ppt; vis-a-vis DEU) | 0.39*** (0.03) | 0.37*** (0.03) | 0.26*** (0.03) | 0.23*** (0.04) | 0.25*** (0.03) | 0.23*** (0.03) | 0.20*** (0.03) | 0.25*** (0.03) | 0.19*** (0.04) | 0.19*** (0.03) |
| Public debt (percent of GDP) | 0.01*** (0.00) | 0.01*** (0.00) | 0.01** (0.00) | 0.01*** (0.00) | 0.01** (0.00) | 0.01*** (0.00) | 0.01*** (0.00) | 0.01** (0.00) | 0.01** (0.00) | 0.01*** (0.00) |
| GG primary balance (percent of GDP) | -0.04** (0.02) | -0.02 (0.02) | 0.02 (0.02) | 0.05** (0.02) | 0.02 (0.02) | 0.02 (0.02) | 0.01 (0.02) | 0.02 (0.02) | 0.03 (0.03) | 0.02 (0.02) |
| Real GDP growth (percent) | -0.10*** (0.02) | -0.08*** (0.02) | -0.09*** (0.02) | -0.09*** (0.02) | -0.09*** (0.02) | -0.10*** (0.02) | -0.08*** (0.02) | -0.10*** (0.02) | -0.11*** (0.03) | -0.08*** (0.02) |
| Inflation (percent) | 0.21*** (0.05) | 0.21*** (0.05) | 0.21*** (0.04) | 0.18*** (0.05) | 0.19*** (0.05) | 0.12** (0.05) | 0.15*** (0.04) | 0.20*** (0.04) | 0.16** (0.06) | 0.10** (0.05) |
| EU Systematic stress index | 7.11*** (0.86) | 5.36*** (0.86) | 5.35*** (0.86) | 5.59*** (0.93) | 6.77*** (0.95) | 6.28*** (0.85) | 5.72*** (0.95) | 4.53*** (1.04) | 7.08*** (0.94) | |
| US Systematic stress index | -6.67*** (1.10) | -4.41*** (1.10) | -4.15*** (1.10) | -4.72*** (1.22) | -6.23*** (1.23) | -5.28*** (1.08) | -4.94*** (1.23) | -3.14** (1.36) | -6.38*** (1.21) | |
| Political risk rating (high=high risk) | 1.39*** (0.20) | 1.52*** (0.20) | 1.42*** (0.20) | 1.50*** (0.20) | 1.47*** (0.19) | 1.48*** (0.22) | 2.12*** (0.31) | 1.53*** (0.21) | ||
| EA Monetary policy stance (+=tight) | 0.14*** (0.05) | |||||||||
| ECB policy rate | 0.06 (0.08) | |||||||||
| Shadow interest rate | 0.18*** (0.05) | 0.12** (0.06) | ||||||||
| PSPP+PEPP net purchase (percent of public debt) | -0.22*** (0.06) | -0.20*** (0.06) | ||||||||
| PSPP+PEPP net purchase (percent of public debt; square) | 0.01* (0.01) | 0.01* (0.01) | ||||||||
| Whatever it takes index (standardized) | -0.08 (0.09) | 0.01 (0.10) | ||||||||
| ECB communication (0–1=accommodative) | -1.53** (0.70) | |||||||||
| Constant | -0.35 (0.25) | -0.85*** (0.26) | -0.27 (0.26) | -0.25 (0.26) | -0.35 (0.29) | -0.42 (0.26) | -0.34 (0.25) | -0.22 (0.27) | 0.25 (0.51) | -0.43 (0.26) |
| Observations | 244 | 244 | 244 | 244 | 244 | 244 | 244 | 244 | 189 | 244 |
| Country | 13 | 13 | 13 | 13 | 13 | 13 | 13 | 13 | 13 | 13 |
Euro Area: Empirical Results—Heterogeneous Monetary Policy Effects
Euro Area: Empirical Results—Heterogeneous Monetary Policy Effects
| Spread on 10Y government bond (ppt; vis-a-vis DEU) | |||||||
|---|---|---|---|---|---|---|---|
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | |
| EA Monetary policy stance (+=tight) when positive delta (tightening) | 0.12 (0.08) | ||||||
| EA Monetary policy stance (+=tight) when negative delta (loosening) | 0.14*** (0.05) | ||||||
| ECB policy rate when positive delta (tightening) | 0.06 (0.08) | ||||||
| ECB policy rate when negative delta (loosening) | 0.04 (0.10) | ||||||
| Shadow interest rate when positive delta (tightening) | 0.17*** (0.05) | ||||||
| Shadow interest rate when negative delta (loosening) | 0.19*** (0.06) | ||||||
| Whatever it takes index (standardized) when tightening MP stance | -0.31* (0.16) | ||||||
| Whatever it takes index (standardized) when loosening MP stance | -0.06 (0.09) | ||||||
| ECB communication (0–1=accommodative) when tightening MP stance | -1.85*** (0.71) | | ||||||
| ECB communication (0–1=accommodative) when loosening MP stance | -0.44 (0.74) | ||||||
| PSPP+PEPP net purchase (percent of public debt) x high debt country | -0.25*** (0.05) | ||||||
| PSPP+PEPP net purchase (percent of public debt) x non-high debt country | -0.08*** (0.02) | ||||||
| PSPP+PEPP net purchase (percent of public debt) | -0.11*** (0.02) | ||||||
| PSPP+PEPP net purchase (percent of public debt) x the public debt ratio | -0.0005*** (0.00) | ||||||
| Observations | 244 | 244 | 244 | 244 | 189 | 244 | 244 |
| Country | 13 | 13 | 13 | 13 | 13 | 13 | 13 |
Euro Area: Empirical Results—Heterogeneous Monetary Policy Effects
| Spread on 10Y government bond (ppt; vis-a-vis DEU) | |||||||
|---|---|---|---|---|---|---|---|
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | |
| EA Monetary policy stance (+=tight) when positive delta (tightening) | 0.12 (0.08) | ||||||
| EA Monetary policy stance (+=tight) when negative delta (loosening) | 0.14*** (0.05) | ||||||
| ECB policy rate when positive delta (tightening) | 0.06 (0.08) | ||||||
| ECB policy rate when negative delta (loosening) | 0.04 (0.10) | ||||||
| Shadow interest rate when positive delta (tightening) | 0.17*** (0.05) | ||||||
| Shadow interest rate when negative delta (loosening) | 0.19*** (0.06) | ||||||
| Whatever it takes index (standardized) when tightening MP stance | -0.31* (0.16) | ||||||
| Whatever it takes index (standardized) when loosening MP stance | -0.06 (0.09) | ||||||
| ECB communication (0–1=accommodative) when tightening MP stance | -1.85*** (0.71) | | ||||||
| ECB communication (0–1=accommodative) when loosening MP stance | -0.44 (0.74) | ||||||
| PSPP+PEPP net purchase (percent of public debt) x high debt country | -0.25*** (0.05) | ||||||
| PSPP+PEPP net purchase (percent of public debt) x non-high debt country | -0.08*** (0.02) | ||||||
| PSPP+PEPP net purchase (percent of public debt) | -0.11*** (0.02) | ||||||
| PSPP+PEPP net purchase (percent of public debt) x the public debt ratio | -0.0005*** (0.00) | ||||||
| Observations | 244 | 244 | 244 | 244 | 189 | 244 | 244 |
| Country | 13 | 13 | 13 | 13 | 13 | 13 | 13 |
Prepared by La-Bhus Fah Jirasavetakul (SPR). Analysis in this Annex is based on the joint forthcoming working paper entitled “Determinants of Sovereign Bond Spreads in the Euro Area” (Jirasavetakul, Ljungman, and Shahmoradi, forthcoming).
For studies related to the impacts of macroeconomic fundamentals and risk factors on sovereign bond spreads, see, for example, Codogno and others (2003); Gomez-Puig (2006); Manganelli and Wolswijk (2009); Sgherri and Zoli (2009); Gomez-Puig and others (2014); Alfonso and others (2015); and Ceci and Pericoli (2022). For those related to the impacts of unconventional monetary policy intervention, see, for example, Andrade and others (2016); Afonso and Kazemi (2018); De Santis (2020); Altavilla and others (2019 and 2021); Rostagno and others (2021); Havlik and others (2022); Blotevogel and others (2022).
The dataset includes only those euro area countries for which the full set of variables is available.
While earlier studies primarily focused on short-term spread dynamics, this paper examines more persistent determinants of spreads, which are likely more relevant for fiscal sustainability and financial stability.
For a detailed description of the variables, see empirical result tables in the Appendix.
Other recent literature measures the ECB’s monetary policy and communication by constructing monetary policy surprise measures, using high frequency financial data around the ECB press conferences.
The insignificant correlation between spreads and fiscal balance after controlling for public debt is consistent with a few studies. In particular, some studies conclude that the effect of fiscal performance is small during normal times but high during crisis periods (Afonso and Rault, 2015; Afonso and others, 2015).
Empirical results throughout the paper are robust to additionally controlling for euro area-wide inflation (which could be used to capture co-movements of inflation among euro area countries).
See tables in the Appendix for further details on empirical results.
Despite being operationally different, these monetary policy tools are found to be highly correlated. Therefore, the regression analysis only includes one monetary policy tool at a time to avoid a strong correlation among explanatory variables.
It is important to note that the public debt ratio can be a proxy for both a borrower’s credit risk and the size and depth of sovereign bond market.
Eijffinger and Pieterse-Bloem (2022) conduct a sequential test and find three major break points in Euro area sovereign bond spreads and their relationship with economic and risk factors, namely, the period prior to mid-2010, mid-2010 to 2013 (the sovereign debt crisis), and post-2013 when the policy rate entered negative territory and the ECB started their quantitative easing intervention. Given a much smaller time dimension when using annual data, a major structural break adopted in this paper is 2013. For the period prior to 2013, dummy variables capturing the sub-periods of global financial crisis and the Eurozone sovereign debt crisis are included (similar to Afonso and others, 2015).
