Dispelling the Shadow of Fiscal Dominance? Fiscal and Monetary Announcement Effects for Euro Area Sovereign Spreads in the Corona Pandemic

37 Pages Posted: 28 Jun 2021

See all articles by Annika Havlik

Annika Havlik

ZEW – Leibniz Centre for European Economic Research; University of Mannheim

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Samuel Helbig

ZEW – Leibniz Centre for European Economic Research

Justus Nover

ZEW – Leibniz Centre for European Economic Research

Date Written: 2021

Abstract

We use event study regressions to compare the impact of EU monetary versus fiscal policy announcements on government bond spreads of ten euro member countries. Our motivation is to evaluate which of the two players – the ECB or the EU fiscal level – has been more crucial for the stabilization of euro sovereign bond markets in the crisis environment of the pandemic. This question is of substantial relevance to assess potential risks for the effective independence of the ECB in the future. Our key result is that the pandemic monetary emergency measures through the PEPP have been highly effective, whereas fiscal rescue announcements had much less impact. We document a smaller and statistically significant spread-reducing effect only for the announcement of the ‘Next Generation EU’ program. In contrast, a temporary relaxation of European fiscal rules through the activation of the emergency-escape clause under the Stability and Growth Pact is associated with rising spreads. Our results have an unpleasant implication for the debate on a looming fiscal dominance of the ECB in the presence of rising public debt levels as so far, the stabilization of sovereign bond markets appears to hinge largely on the Eurosystem’s role as a massive buyer of high-debt countries’ sovereign bonds.

Keywords: Sovereign spreads, monetary policy, fiscal policy, fiscal dominance, event analysis

JEL Classification: E63, H12, H63, H81

Suggested Citation

Havlik, Annika and Heinemann, Friedrich and Helbig, Samuel and Nover, Justus, Dispelling the Shadow of Fiscal Dominance? Fiscal and Monetary Announcement Effects for Euro Area Sovereign Spreads in the Corona Pandemic (2021). ZEW - Centre for European Economic Research Discussion Paper No. 21-050, Available at SSRN: https://ssrn.com/abstract=3871662 or http://dx.doi.org/10.2139/ssrn.3871662

Annika Havlik (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim ( email )

Mannheim, 68131
Germany

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Samuel Helbig

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Justus Nover

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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