Monetary Policy Implications and Eurozone's Long Term Interest Rate Spreads.

Abstract

We research the association of the sovereign crisis stemming from periphery EMU countries and monetary policy in terms of financial stability. Empirical results are derived on the linkage of monetary policy reflected through interbank lending rates i.e. banking sector fragility to long term sovereign (term) spread premiums pre- and post-Euro Area crisis. Post-crisis the transmission channels of conventional/unconventional monetary policy appear to be ineffective. Moreover, shocks in money market affect more sovereign risk premiums than the opposite. Monetary policy in terms of interbank lending is triggered by countries having banking crises rather sovereign ones.

Keywords: sovereign debt crisis, monetary policy, volatility

JEL Classification: E52, F34, G01, G15