PEPP and NGEU: Short-term Reactions to the Monetary and Fiscal Policy Paradigm Shift in Light of the Lagarde Gaffe

29 Pages Posted: 21 Jul 2022

See all articles by Thomas Jopp

Thomas Jopp

Chair of Business Management and Corporate Finance, University of Wuerzburg

Date Written: July 7, 2022

Abstract

This paper examines the short-term financial market reactions of four issuer-specific gauges for different euro area countries in relation to PEPP (Pandemic Emergency Purchase Programme) as well as NGEU (Next Generation EU) events in 2020 using event-based regressions. In addition, the Lagarde gaffe (“. . . we are not here to close spreads.”) on 12/3/2020 is taken into account. The gauges are the ten-year bond yield, credit spread, CDS spread and CDS-bond basis. The results suggest that the PEPP and the NGEU seem to have been effective in principle, especially for countries with a high sovereign debt ratio. However, the reactions of these countries’ gauges to the Lagarde gaffe indicate that shifting away from the European Central Bank’s “whatever it takes” stance will prove to be extremely difficult. This is highly relevant in the context of the current battle against high inflation rates in the euro area.

Keywords: Event study, Sovereign credit risk, Bond yield, Credit default swap, PEPP, Next Generation EU

JEL Classification: E44, E52, E58, E62, G14

Suggested Citation

Jopp, Thomas, PEPP and NGEU: Short-term Reactions to the Monetary and Fiscal Policy Paradigm Shift in Light of the Lagarde Gaffe (July 7, 2022). Available at SSRN: https://ssrn.com/abstract=4159976 or http://dx.doi.org/10.2139/ssrn.4159976

Thomas Jopp (Contact Author)

Chair of Business Management and Corporate Finance, University of Wuerzburg

Chair of Business Management and Corporate Finance
Sanderring 2
Würzburg, DE Bavaria D-97070
Germany

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

Paper statistics

Downloads
48
Abstract Views
187
PlumX Metrics