The European Economic and Monetary Union (EMU) has created a new economic area, larger and closer with respect to the rest of the world. Area-specific shocks are thus more important in EMU than country-specific shocks used to be in the previous states, e.g. in Germany. It is thus not surprising...

This Paper discusses interest rate setting by the ECB between 1999 and 2004. I develop from the Monthly Bulletins quantitative indicators of the Governing Council’s assessment of inflation, economic activity, and M3 growth, and investigate their impact on its interest rate decisions. I also...

The paper establishes that sovereigns, like banks, need a lender of last resort (LoLR). In the euro area the ECB, with its estimated €3.4 trillion non-inflationary loss absorption capacity, is the only credible sovereign LoLR. The ECB/Eurosystem has been acting as sovereign LoLR through its...

We study the determinants of sovereign bond spreads in the euro area since the introduction of the euro. We show that an aggregate risk factor is a main driver of spreads. This factor also plays an important indirect role for risk spreads through its interaction with the size and structure of...

We study the determinants of euro area sovereign bond spreads since the introduction of the euro. An aggregate risk factor is a main driver of spreads, both directly and indirectly by interacting with the size and structure of national banking sectors. When aggregate risk increases, countries...

This study analyses whether expected budget deficits have an impact on interest rate swap spreads in France, Germany and Italy. We use monthly deficit forecasts from financial market participants to take the forward-looking behaviour of financial markets into account. Results of a SUR estimation...

We investigate the effect of fiscal institutions such as the strength of the finance minister in the budget process and deficits on interest spreads contained in bond yields of the countries now belonging to the Eurozone. Deficits significantly increase risk premia measured by relative swap...

This paper studies the optimal debt repayment policy of a government facing a credibility problem: the public is uncertain about whether the outstanding public debt will be repaid in full or in part and requires a risk premium to roll it over. The model determines when it is optimal for the...

I estimate a reaction function for the ECB using an ordered logit model for the period 1999-2009. Allowing for a smooth transition from one set of parameters to another, I detect a rapid change in middle of 2008.

The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in...