The Response of Euro Area Sovereign Spreads to the ECB Unconventional Monetary Policies

Abstract

We analyse variations in sovereign bond yields and spreads following unconventional monetary policy announcements by the European Central Bank. Using a two-country, arbitrage-free, shadow-rate dynamic term structure model (SR-DTSM), we decompose countries’ yields into expectation and risk premium components. By means of an event study analysis, we show that the ECB’s announcements reduced both the average expected instantaneous spread and risk repricing components of Italian and Spanish spreads. For countries such as Belgium and France, the ECB announcements impacted primarily the risk repricing component of the spread.

Keywords: Term Structure of Interest Rates, Lower Bound, Nonlinear State-Space Model, Monetary Policy Expectations, Unconventional Monetary Policy

JEL Classification: C32, E43, E52