Publications - Working Papers IER SAS

This study assesses the impact of the European Central Bank (ECB) monetary policy shocks on sovereign bond synchronization in the Euro Area during the 2001-2024 period. We examine the extent to which the efficacy of monetary policy transmission can be influenced by the existence of high and low-debt fiscal regimes. We use panel state-dependent local projection method, with conditioning based on the level of sovereign debt to GDP ratio. Our findings indicate that the effect of monetary policy shocks on bond yield synchronization is negligible for low-debt economies. However, we report the impact of standard and unconventional monetary policy shocks on market fragmentation which is driven by the yields of high-debt economies. Empirically derived thresholds are likely not to induce heterogeneity between high- and low-debt regime yields. In contrast, the non-linearity in response is more likely to be attributed to the country-specific maximum sustainable debt levels.