TY - JOUR
T1 - Pandemic shocks and fiscal-monetary policies in the Eurozone
T2 - COVID-19 dominance during January-June 2020
AU - Jinjarak, Yothin
AU - Ahmed, Rashad
AU - Nair-Desai, Sameer
AU - Xin, Weining
AU - Aizenman, Joshua
N1 - Publisher Copyright:
© Oxford University Press 2021.
PY - 2021/10/1
Y1 - 2021/10/1
N2 - We compare the importance of market factors against that of coronavirus disease-19 (COVID-19) dynamics and policy responses in explaining Eurozone sovereign spreads. First, we estimate a multifactor model for changes in credit default swap (CDS) spreads over 2014 to June 2019. Then, we apply a synthetic control-type procedure to extrapolate model-implied changes in CDS. The factor model does very well over the rest of 2019 but breaks down during the pandemic, especially during March 2020. We find that the March 2020 divergence is well accounted for by COVID-specific risks and associated policies, mortality outcomes, and policy announcements, rather than traditional determinants. Daily CDS widening ceased almost immediately after the European Central Bank announced the Pandemic Emergency Purchase Programme, but the divergence between actual and model-implied changes persisted. This points to COVID-19 Dominance - widening spreads during the pandemic has led to unconventional monetary policies that primarily aim to mitigate short-run fears, temporarily pushing away concerns over fiscal risk.
AB - We compare the importance of market factors against that of coronavirus disease-19 (COVID-19) dynamics and policy responses in explaining Eurozone sovereign spreads. First, we estimate a multifactor model for changes in credit default swap (CDS) spreads over 2014 to June 2019. Then, we apply a synthetic control-type procedure to extrapolate model-implied changes in CDS. The factor model does very well over the rest of 2019 but breaks down during the pandemic, especially during March 2020. We find that the March 2020 divergence is well accounted for by COVID-specific risks and associated policies, mortality outcomes, and policy announcements, rather than traditional determinants. Daily CDS widening ceased almost immediately after the European Central Bank announced the Pandemic Emergency Purchase Programme, but the divergence between actual and model-implied changes persisted. This points to COVID-19 Dominance - widening spreads during the pandemic has led to unconventional monetary policies that primarily aim to mitigate short-run fears, temporarily pushing away concerns over fiscal risk.
UR - http://www.scopus.com/inward/record.url?scp=85107468871&partnerID=8YFLogxK
U2 - 10.1093/oep/gpab010
DO - 10.1093/oep/gpab010
M3 - Review article
AN - SCOPUS:85107468871
SN - 0030-7653
VL - 73
SP - 1557
EP - 1580
JO - Oxford Economic Papers
JF - Oxford Economic Papers
IS - 4
ER -
