Template-type: ReDIF-Paper 1.0  
Author-Name: Victor Echevarria-Icaza
Author-Workplace-Name: Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.
Author-Name: Simón Sosvilla-Rivero
Author-Email: sosvilla@ccee.ucm.es
Author-Workplace-Name: Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.
Title: Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach
Abstract: The divergence in sovereign yields has been presented as a reason for the lack of traction of monetary policy. We use a GVAR 
	framework to assess the transmission of monetary policy in the period 2005-2016. We identify sovereign yield divergence as a key 
	mechanism by which the leverage channel of monetary policy worked. Unconventional monetary policy was successful in mitigating this 
	effect. When exploring the channels through which yields may affect the heterogeneous transmission of monetary policy, we find that the 
	reaction of bank leverage depended substantially on where the sovereign yield originated, thus providing a mechanism that explains this 
	heterogeneity. Second, large spillover effects meant that yield divergence decreased the traction of monetary policy even in anchor 
	countries. Third, the heterogeneity in the transmission mechanism can be in part attributed to contagion from euro area wide sovereign 
	stress. Fiscal credibility, therefore, may be an appropriate tool to enhance the output effect of monetary policy. Given the importance 
	of spillovers, this credibility may be achieved by changes in the institutional make up and policies in the euro area.
Keywords:
 Monetary policy; Spillovers; Euro area crisis.
Creation-Date: 2017
Length: 38 pages
Number: 1703
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/wpaper17-03.txt
File-URL: https://eprints.ucm.es/id/eprint/41608/1/WP%2003-17.pdf
File-Format: Application/pdf
File-Function: Full text
Handle: RePEc:ucm:wpaper:1703