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Market discipline and the use of government bonds as collateral in the EMU

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Author Info
Ullrich, Katrin

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Abstract

The confidence that financial markets are able to discipline the debt behaviour of governments is not very high. Therefore, the Stability and Growth Pact has been implemented as an institutional constraint to substitute for the market mechanism. With the weakening of the Pact, market discipline could gain importance again. To strengthen market discipline, reasons for its failure in the euro area have to be analysed. One possible reason could be that the European Central Bank accepts all European government bonds without distinction in its monetary policy auctions as collateral. This could provide the financial market with a signal that these government securities are equally (non-)risky and that a differentiation with respect to risk premia is not needed. --

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Publisher Info
Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 06-46.

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Date of creation: 2006
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Handle: RePEc:zbw:zewdip:5436

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Related research
Keywords: Stability and Growth Pact; Market Discipline; Collateral; Repo;

Find related papers by JEL classification:
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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    Other versions:
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  6. Gande, Amar & Parsley, David C., 2005. "News spillovers in the sovereign debt market," Journal of Financial Economics, Elsevier, vol. 75(3), pages 691-734, March. [Downloadable!] (restricted)
    Other versions:
  7. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR, CES, MSH, vol. 13(26), pages 65-113, 04. [Downloadable!] (restricted)
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  11. Sylvester Eijffinger, 2003. "How can the Stability and Growth Pact be improved to achieve both stronger discipline and higher flexibility?," Intereconomics: Review of European Economic Policy, Springer, vol. 38(1), pages 10-15, January. [Downloadable!] (restricted)
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  13. Arnold, Ivo & Lemmen, Jan, 2001. "The Vulnerability of Banks to Government Default Risk in the EMU," International Finance, Blackwell Publishing, vol. 4(1), pages 101-25, Spring. [Downloadable!] (restricted)
    Other versions:
  14. Eichengreen, Barry & von Hagen, Jürgen, 1995. "Fiscal Policy and Monetary Union: Federalism, Fiscal Restrictions and the No-Bailout Rule," CEPR Discussion Papers 1247, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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