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Sovereign spreads in the Euro area: Cross border transmission and macroeconomic implications

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  • Bahaj, Saleem

Abstract

Large movements in sovereign spreads were at the heart of the euro crisis. This paper builds a new high-frequency narrative dataset of country specific events in the crisis period to identify shocks to sovereign spreads that are orthogonal to the economy. It finds that an increase in sovereign spreads has a contractionary macroeconomic impact with transmission running through a deterioration in private financial conditions. Moreover, the market reactions to foreign events explains a meaningful share of the variation in a sovereign’s cost of borrowing during the crisis.

Suggested Citation

  • Bahaj, Saleem, 2020. "Sovereign spreads in the Euro area: Cross border transmission and macroeconomic implications," Journal of Monetary Economics, Elsevier, vol. 110(C), pages 116-135.
    • Handle: RePEc:eee:moneco:v:110:y:2020:i:c:p:116-135
    DOI: 10.1016/j.jmoneco.2019.01.006
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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