Economic Letter - The Effect of ECB Policy Announcements on Sovereign Yields: A Return to Normal Transmission?

14 May 2018 Press Release

Central Bank of Ireland

An Economic Letter by Robert Goodhead examines the effects of European Central Bank (ECB) policy announcements on sovereign yields in pre-crisis, crisis and post-crisis periods. The paper measures ECB policy changes by movements in market expectations and the analysis focuses on Germany, France, Italy and Spain.

The key findings are:

  • There was a breakdown of transmission of ECB policy to sovereign yields in Italy and Spain during the financial and European sovereign debt crisis, while transmission to German and French bonds was largely unaffected.
  • Transmission of ECB policy for Italy and Spain is found to have reverted to that of “normal” times in the post-crisis period, with transmission shown to be comparable to the pre-crisis period, if not stronger.
  • The impairment in transmission in Italy and Spain can therefore be said to be limited to the period before the sharp falls in sovereign bond yields and volatility that followed the announcements from the ECB of the Outright Monetary Transaction (OMT) programme.

The views presented in Economic Letters are those of the authors and do not necessarily represent the official views of the Central Bank of Ireland.

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