Abstract
AbstractWe provide evidence that the European Central Bank (ECB's) unconventional monetary policy dampens yield cycles in secondary markets for Eurozone sovereign debt around new sovereign debt auctions. This dampening effect tends to be larger when market volatility is higher. Cycles caused by domestic auctions and the role of market volatility are largest for countries with low credit ratings. Auctions by these countries also generate significant auction cycles in other countries. Such cycles can have a nonnegligible effect on debt‐servicing costs, but these can be limited through central bank purchases in turbulent periods, debt issuance in tranquil periods, and coordination of national auction calendars.
Highlights
During and following the Eurozone debt crisis the European Central Bank (ECB) was forced to undertake unconventional monetary policy measures
The ECB is forbidden to trade in the primary market for public debt and claims not to affect price formation in this market,1 this paper presents evidence that the sovereign debt purchases by the European System of Central Banks (ESCB) affect servicing costs of new debt by dampening the “auction cycles” in the secondary market for sovereign debt
While recent research already showed the existence of auction cycles (Lou et al 2013, Beetsma et al 2016, 2018), we extend this work into a variety of directions, in particular by allowing for a role of ESCB interventions
Summary
During and following the Eurozone debt crisis the European Central Bank (ECB) was forced to undertake unconventional monetary policy measures. The model shows that auction cycles tend to be larger, when market volatility is higher This effect is in turn dampened when ESCB sovereign bond purchases are increased. We find evidence that larger amounts of central bank sovereign debt purchases tend to dampen both the average size of the cycles associated with domestic and foreign auctions, as well as the positive effect of market volatility on the magnitude of these cycles. It provides some back-of-the-envelope calculations for the effect of auction cycles on debt-servicing costs and the influence of ESCB sovereign debt purchases in moderating these costs.
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