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Market discipline, financial integration and fiscal rules: what drives spreads in the euro area government bond market?

  • Manganelli, Simone
  • Wolswijk, Guido

This paper studies the determinants of interest rate spreads of euro area 10 year government bonds against the benchmark, the German bund, after the introduction of the euro. In particular, it pays attention to the question whether market discipline is advanced or obstructed by financial integration and by fiscal rules like the Stability and Growth Pact. We first argue that financial integration – by improving market efficiency – is instrumental for markets to exert their disciplinary role. Next, we discuss the relationships between market discipline and fiscal rules, arguing that these in principle may reinforce each other. Finally, we provide strong empirical evidence that spreads depend on the ratings of the underlying bond and to a large extent are driven by the level of short-term interest rates. JEL Classification: G12, G18, C23

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Paper provided by European Central Bank in its series Working Paper Series with number 0745.

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Date of creation: Apr 2007
Date of revision:
Handle: RePEc:ecb:ecbwps:20070745
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  1. Browne, Frank & Cronin, David, 2010. "Commodity prices, money and inflation," Journal of Economics and Business, Elsevier, vol. 62(4), pages 331-345, July.
  2. Dias, D. & Dossche, M. & Gautier, E. & Hernando, I. & Sabbatini , R. & Stahl , H. & Vermeulen, P., 2007. "Macro Price setting in the euro area: Some stylised facts from Individual Producer Price," Working papers 164, Banque de France.
  3. Faia, Ester, 2007. "Ramsey monetary policy with labour market frictions," Working Paper Series 0707, European Central Bank.
  4. Cipriani, Marco & Guarino, Antonio, 2007. "Transaction costs and informational cascades in financial markets: Theory and experimental evidence," Working Paper Series 0736, European Central Bank.
  5. Cuadro-Sáez, Lucía & Fratzscher, Marcel & Thimann, Christian, 2009. "The transmission of emerging market shocks to global equity markets," Journal of Empirical Finance, Elsevier, vol. 16(1), pages 2-17, January.
  6. Mendicino, Caterina, 2007. "Credit market and macroeconomic volatility," Working Paper Series 0743, European Central Bank.
  7. Gropp, Reint & Kok, Christoffer & Lichtenberger, Jung-Duk, 2007. "The dynamics of bank spreads and financial structure," Working Paper Series 0714, European Central Bank.
  8. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  9. Jan Bruha & Jiri Podpiera, 2006. "Transition Economy Convergence in a Two-Country Model," Computing in Economics and Finance 2006 154, Society for Computational Economics.
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