Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach
The divergence in sovereign yields has been presented as a reason for the lack of traction of monetary policy. We use a GVAR framework to assess the transmission of monetary policy in the period 2005-2016. We identify sovereign yield divergence as a key mechanism by which the leverage channel of monetary policy worked. Unconventional monetary policy was successful in mitigating this effect. When exploring the channels through which yields may affect the heterogeneous transmission of monetary policy, we find that the reaction of bank leverage depended substantially on where the sovereign yield originated, thus providing a mechanism that explains this heterogeneity. Second, large spillover effects meant that yield divergence decreased the traction of monetary policy even in anchor countries. Third, the heterogeneity in the transmission mechanism can be in part attributed to contagion from euro area wide sovereign stress. Fiscal credibility, therefore, may be an appropriate tool to enhance the output effect of monetary policy. Given the importance of spillovers, this credibility may be achieved by changes in the institutional make up and policies in the euro area.
|Date of creation:||2017|
|Contact details of provider:|| Postal: Finca Mas Ferre, Campus de Somosaguas, 28223 Madrid|
Phone: +34 913942495
Fax: 34 91 394 24 87
Web page: https://www.ucm.es/icei/
More information through EDIRC
|Order Information:|| Postal: Instituto Complutense de Estudios Internacionales. Finca Mas Ferre Campus de Somosaguas 28223 Madrid|
When requesting a correction, please mention this item's handle: RePEc:ucm:wpaper:1703. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Águeda González Abad)
If references are entirely missing, you can add them using this form.