'Pure' or 'Wake-Up-Call' Contagion? Another Look at the EMU Sovereign Debt Crisis

26 Pages Posted: 30 Aug 2012

Date Written: August 24, 2012

Abstract

We test whether the sharp increase in sovereign spreads of Euro area countries with respect to Germany observed after the burst of the Greek crisis on October 2009 is due to a deterioration of the macroeconomic and fiscal scenarios, or to some form of financial contagion. More in detail, we consider several forms of contagion, distinguishing between an increased attention devoted by investors to those variables which ultimately determine the creditworthiness of a sovereign borrower ("wake-up call" contagion) and behaviour disconnected from fundamentals ("pure" contagion). We consider among the fundamentals also indicators of domestic and external imbalances which, before the crisis, were ignored by economists and policy-makers alike. We find evidence of "wake-up call" contagion. Instead, we do not find evidence of "pure" contagion. However, some countries, notably Italy and Spain, experienced with the crisis a large overshooting of their spreads with respect to the new long-term levels.

Keywords: contagion. EMU debt crisis, panel cointegration

JEL Classification: G12, G15

Suggested Citation

Giordano, Raffaela and Pericoli, Marcello and Tommasino, Pietro, 'Pure' or 'Wake-Up-Call' Contagion? Another Look at the EMU Sovereign Debt Crisis (August 24, 2012). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2135435 or http://dx.doi.org/10.2139/ssrn.2135435

Raffaela Giordano

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Marcello Pericoli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://www.bancaditalia.it

Pietro Tommasino

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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