Saka et al. (2015) - ECB policy and Eurozone fragility.pdf (366.93 kB)
ECB policy and Eurozone fragility: was De Grauwe right?
journal contributionposted on 2023-06-09, 17:37 authored by Orkun Saka, Ana-Maria Fuertes, Elena Kalotychou
Paul De Grauwe’s Eurozone fragility hypothesis states that sovereign debt markets in a monetary union without a lender-of-last-resort are vulnerable to a self-fulfilling dynamics fuelled by pessimistic investor sentiment that can trigger default. We test this contention by applying an eclectic methodology to a two-year window around Mario Draghi’s “whatever-it-takes” pledge that can be understood as the implicit announcement of the Outright Monetary Transactions (OMT) program. A principal components analysis reveals that the perceived commonality in default risk among peripheral and core Eurozone sovereigns increased after the announcement. An event study reveals significant pre-announcement news transmission from Spain to Italy, France, Belgium and Austria that clearly dissipates post-announcement. Country-specific regressions of CDS spreads on systematic risk factors reveal frequent days of large adverse shocks affecting simultaneously those five Eurozone countries during the pre-announcement period. Altogether these findings support the fragility hypothesis and endorse the OMT program.
- Accepted version
JournalJournal of International Money and Finance
Department affiliated with
- Business and Management Publications
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