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Contagion across Eurozone’s sovereign spreads and the Core-Periphery divide

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  • Elisabetta Croci Angelini
  • Francesco Farina

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  • Enzo Valentini

Abstract

This paper investigates the causes of disproportionate increases of sovereign yields with respect to the interest rate on the 10 years German Bund within the Eurozone. Empirical evidence drawn from the Bank for International Settlements dataset on banks’ portfolios shows that rapid financial integration, following the launch of the monetary union, resulted in excess exposure of Core countries’ banks in the Peripheral countries’ financial assets. In order to endogenize the possibility of contagion effects, we conduct econometric estimates through a Global Vector Autoregressive model, where each country’s spread depends upon all Eurozone countries’ spreads. Results show that after the burst of the financial crisis the Core countries’ sovereign yields are essentially determined by the international risk aversion, whereas the spreads of Peripheral countries mainly depend on fundamentals, namely the public debt/GDP ratio and the Real Effective Exchange Rate values with respect to the Eurozone average. These results are supported by the estimate of an impulse response analysis. Macroeconomic failures in public finances and competitiveness seem to originate the exceptional increases in sovereign spreads of the Periphery, through a contagion effect which is limited to this group of Eurozone countries. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Elisabetta Croci Angelini & Francesco Farina & Enzo Valentini, 2016. "Contagion across Eurozone’s sovereign spreads and the Core-Periphery divide," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(1), pages 197-213, February.
  • Handle: RePEc:kap:empiri:v:43:y:2016:i:1:p:197-213
    DOI: 10.1007/s10663-015-9300-8
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    Cited by:

    1. Roberto Tamborini, 2017. "Europe at the Interdependence War," EconPol Working Paper 2, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Francesco Farina & Roberto Tamborini, 2015. "Europe's Great Divide. A geo-economic-political map," LEQS – LSE 'Europe in Question' Discussion Paper Series 101, European Institute, LSE.
    3. Mirdala, Rajmund & Ruščáková, Anna, 2015. "On Origins and Implications of the Sovereign Debt Crisis in the Euro Area," MPRA Paper 68859, University Library of Munich, Germany.
    4. Francesco Saraceno & Roberto Tamborini, 2015. "How can it work? On the impact of quantitative easing in the Eurozone," DEM Working Papers 2015/03, Department of Economics and Management.
    5. Roberto Tamborini, 2018. "Macroeconomic Imbalances and the Euro Zone. Alternative Views," EconPol Working Paper 14, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    More about this item

    Keywords

    Sovereign bond spreads; Monetary union; International risk aversion; Contagion; E42; F36; F42; G12; H63;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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