Fundamentals versus market sentiments in the euro bond markets: Implications for QE

15-05-2017

Despite the partial realignment of European long-term government bonds after the crisis in 2012, there has been some renewed divergence in yields in the last years. We find that the government bond markets in the euro area are highly sensitive to changing market sentiments, both in time and across countries. Our analysis suggests that pulling the plug on QE too soon might undo some of the benefits of QE in the countries of the periphery and may lead to increases in the refinancing costs of member states with little or no fiscal space.

Despite the partial realignment of European long-term government bonds after the crisis in 2012, there has been some renewed divergence in yields in the last years. We find that the government bond markets in the euro area are highly sensitive to changing market sentiments, both in time and across countries. Our analysis suggests that pulling the plug on QE too soon might undo some of the benefits of QE in the countries of the periphery and may lead to increases in the refinancing costs of member states with little or no fiscal space.

Autore esterno

Paul DE GRAUWE (LSE), Yuemei JI (University College London and LSE), Corrado MACCHIARELLI (Brunel University London and LSE)