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Fragmentation in the European Monetary Union: Is it really over?

Author

Listed:
  • Candelon, Bertrand

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • Luisi , Angelo

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • Roccazzella, Francesco

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

Abstract

Sovereign bond market fragmentation represents one of the major challenges European authorities have had to tackle since the outburst of the euro area debt crisis in 2010. By investigating the inter-country shock transmission through a new methodology that reconciles Factor and Global Vector Autoregressive models, we first show that fragmentation risk well preceded the sovereign debt crisis outburst. Most importantly, by analyzing the recent period, we document a rise in fragmentation risk in the euro area during the COVID pandemic. This rise, connected to the pressure on public debts and deficits due to the pandemic period, questions the European integration process and calls for early measures to avoid a new sovereign debt crisis.

Suggested Citation

  • Candelon, Bertrand & Luisi , Angelo & Roccazzella, Francesco, 2022. "Fragmentation in the European Monetary Union: Is it really over?," LIDAM Reprints LFIN 2022001, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlr:2022001
    DOI: https://doi.org/10.1016/j.jimonfin.2021.102545
    Note: In: Journal of International Money and Finance, 2022, vol. 122, 102545
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    Cited by:

    1. Bertrand Candelon & Francesco Roccazzella, 2025. "Evaluating Inflation Forecasts in the Euro Area and the Role of the ECB," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 44(3), pages 978-1008, April.
    2. Roccazzella, Francesco & Candelon, Bertrand, 2022. "Should we care about ECB inflation expectations?," LIDAM Discussion Papers LFIN 2022004, Université catholique de Louvain, Louvain Finance (LFIN).
    3. Costola, Michele & Iacopini, Matteo, 2023. "Measuring sovereign bond fragmentation in the Eurozone," Finance Research Letters, Elsevier, vol. 51(C).
    4. Martin Feldkircher & Karin Klieber, 2024. "Integration or fragmentation? A closer look at euro area financial markets," Chapters, in: Guglielmo M. Caporale (ed.), Handbook of Financial Integration, chapter 19, pages 443-469, Edward Elgar Publishing.

    More about this item

    Keywords

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    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • 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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