'Loose Lips Sinking Markets?': The Impact of Political Communication on Sovereign Bond Spreads

29 Pages Posted: 24 Aug 2013

See all articles by Thomas Gade

Thomas Gade

National Bank of Denmark

Marion Salines

European Central Bank (ECB) - Directorate General International and European Relations

Gabriel Glöckler

European Central Bank (ECB)

Steffen Strodthoff

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: May 24, 2013

Abstract

Taking a cue from the assertion that "loose lips sink markets" (Carmassi and Micossi, 2010), this paper investigates to what extent and why political communication has had an impact on the sovereign bond spreads of selected euro area countries over the German Bund. Drawing on 25,000 news media releases between January 2009 and October 2011, it empirically compares political communication across various political actors at the supranational and national levels in the euro area. It finds empirical evidence that, in the short term, certain types of political communication have a quantifiable effect on sovereign bond spreads. This effect can be positive or negative depending on the type of communication, possibly fueling self-reinforcing feedback loops between markets and policy actions. Subsequently, this paper explores possible reasons for this observed phenomenon. It analyses the specific economic, political and institutional context in which political communication works in Europe and finds that the potential for miscommunication is structurally higher in the euro area than in other nation-based currency areas. Finally, the paper identifies avenues to make communication policy more effective and puts forward possible measures to mitigate the risks of miscommunication.

Keywords: political communication, Public finances, sovereign bond spreads, sovereign debt crisis

JEL Classification: G21, G12

Suggested Citation

Gade, Thomas and Salines, Marion and Glöckler, Gabriel and Strodthoff, Steffen, 'Loose Lips Sinking Markets?': The Impact of Political Communication on Sovereign Bond Spreads (May 24, 2013). ECB Occasional Paper No. 150, Available at SSRN: https://ssrn.com/abstract=2269624 or http://dx.doi.org/10.2139/ssrn.2269624

Thomas Gade (Contact Author)

National Bank of Denmark ( email )

Havnegade 5
DK-1093 Copenhagen K
Denmark

Marion Salines

European Central Bank (ECB) - Directorate General International and European Relations ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Gabriel Glöckler

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Steffen Strodthoff

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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