<abstract xmlns="http://www.w3.org/1999/xhtml"><p>This paper combines analysis of evolution in euro area government bond market integration and interference of European Central Bank with functioning of respective market recently. Since the introduction of euro, government bond yields converged in the euro area, bonds of different countries have become close substitutes in the perception of investors, and overall integration of the market was rather high. At the end of 2008, dramatic shift occurred and ever since disintegrative forces were set in motion. The paper presents the following measures of integration of the government bond markets: yield spreads, dispersion in yield spreads and beta coefficient. All three measures suggest unprecedented market disintegration as of 2010. The paper highlighted relevance of sovereign bond market for the smooth functioning of the monetary policy transmission mechanism in a monetary union context. Three ECB’s programmes aimed at sovereign debt crisis resolution were analysed in details. They proved successful in lowering peripheral countries’ yields and spreads, and calming the markets. If one takes central bank function of the lender of last resort for banks, then these programmes may be viewed as the “buyer of last resort” device for government bonds. Although warranted by exceptional circumstances and need for swift response, a due caution should be paid to these programmes since they pose certain challenges for conduct of monetary policy and might even have unintended consequences.</p></abstract>

This paper combines analysis of evolution in euro area government bond market integration and interference of European Central Bank with functioning of respective market recently. Since the introduction of euro, government bond yields converged in the euro area, bonds of different countries have become close substitutes in the perception of investors, and overall integration of the market was rather high. At the end of 2008, dramatic shift occurred and ever since disintegrative forces were set in motion. The paper presents the following measures of integration of the government bond markets: yield spreads, dispersion in yield spreads and beta coefficient. All three measures suggest unprecedented market disintegration as of 2010. The paper highlighted relevance of sovereign bond market for the smooth functioning of the monetary policy transmission mechanism in a monetary union context. Three ECB’s programmes aimed at sovereign debt crisis resolution were analysed in details. They proved successful in lowering peripheral countries’ yields and spreads, and calming the markets. If one takes central bank function of the lender of last resort for banks, then these programmes may be viewed as the “buyer of last resort” device for government bonds. Although warranted by exceptional circumstances and need for swift response, a due caution should be paid to these programmes since they pose certain challenges for conduct of monetary policy and might even have unintended consequences.

Integration of Government Bond Market in the Euro Area and Monetary Policy

Faculty of Economics, University of Belgrade

Journal of Central Banking Theory and Practice

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Integration of Government Bond Market in the Euro Area and Monetary Policy"}

This paper combines analysis of evolution in euro area government bond market integration and interference of European Central Bank with functioning of...

Integration of Government Bond Market in the Euro Area and Monetary Policy

Published Online: Jan 26, 2016

Page range: 71 - 97

DOI: https://doi.org/10.1515/jcbtp-2016-0004

Keywords
sovereign debt, bond markets integration, crisis, yield spread, central bank asset purchases

© 2016 Central Bank of Montenegro

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Integration of Government Bond Market in the Euro Area and Monetary Policy

Published Online: Jan 26, 2016

Page range: 71 - 97

DOI: https://doi.org/10.1515/jcbtp-2016-0004

Keywordssovereign debt, bond markets integration, crisis, yield spread, central bank asset purchases

© 2016 Central Bank of Montenegro

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
sovereign debt, bond markets integration, crisis, yield spread, central bank asset purchases