Funding Liquidity, Credit Risk and Unconventional Monetary Policy in the Euro Area: A GVAR Approach

19 Pages Posted: 18 Nov 2021 Last revised: 9 Jun 2022

See all articles by Graziano Moramarco

Graziano Moramarco

University of Bologna - Department of Economics

Date Written: September 1, 2021

Abstract

This paper investigates the transmission of funding liquidity shocks, credit risk shocks and unconventional monetary policy within the Euro area. To this aim, we estimate a financial GVAR model for Germany, France, Italy and Spain on monthly data over the period 2006-2017. The interactions between repo markets, sovereign bonds and banks' CDS spreads are analyzed, explicitly accounting for the country-specific effects of the ECB’s asset purchase programmes. Impulse response analysis signals marginally significant core-periphery heterogeneity, flight-to-quality effects and spillovers between liquidity conditions and credit risk. Simulated reductions in ECB programmes tend to result in higher government bond yields and bank CDS spreads, especially for Italy and Spain, as well as in falling repo trade volumes and rising repo rates across the Euro area. However, only a few responses to shocks achieve statistical significance.

Keywords: GVAR, liquidity, repo market, sovereign bonds, banks, CDS

JEL Classification: C32, E58, E44, E47, G12

Suggested Citation

Moramarco, Graziano, Funding Liquidity, Credit Risk and Unconventional Monetary Policy in the Euro Area: A GVAR Approach (September 1, 2021). Available at SSRN: https://ssrn.com/abstract=3954163 or http://dx.doi.org/10.2139/ssrn.3954163

Graziano Moramarco (Contact Author)

University of Bologna - Department of Economics

Piazza Scaravilli 2
Bologna, 40126
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
50
Abstract Views
401
PlumX Metrics