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We estimate the response of sovereign bond prices to net supply shocks caused by purchase operations under the ECB's Public Sector Purchase Programme (PSPP). To avoid simultaneity bias in the estimated relationship between prices and purchases, we exploit a PSPP feature that renders securities temporarily ineligible for reasons unrelated to their prices. Using these purchase restrictions as an instrument to identify exogenous variation in purchase volumes, we find that PSPP causes statistically significant and economically relevant upward price impacts. The impacts are short‐lived and concentrated in securities issued by higher yield jurisdictions and characterized by higher maturity and lower liquidity.

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. (2009) to identify structural cost of borrowing shocks. Our baseline estimation shows that a one percentage point rise in the cost of borrowing leads to a cumulative improvement of the primary balance-to-GDP ratio of approximately 1.9 percentage points over 10 years, with the …scal response becoming signi…cantly evident only two years after the shock. We also …nd that the bulk of …scal adjustment takes place via a rise in government revenue rather than a cut in primary expenditure. The size of the total …scal adjustment, however, is insu¢ cient to avoid the gross government debt-to-GDP ratio from rising as a consequence of the shock. Sub-dividing our sample, we also …nd that for countries participating in Economic and Monetary Union (EMU) the primary balance response to a cost of borrowing shock was stronger in the period after 1992 (the year in which the Maastricht Treaty was signed) than prior to 1992. Terms of use: Documents in EconStor mayKeywords: Fiscal policy, Long-term interest rates, Vector-autoregressive models, Sign restrictions JEL classi…cations: C33, E43, E62, H60 1 Non-technical summaryDuring the ongoing European sovereign debt crisis, sharp rises in yields on government bonds have been met with promises from governments to accelerate and expand their …scal consolidation plans. To the extent these promises are acted upon, this behaviour can be interpreted as a form of market imposed …scal discipline. Against this background, this paper examines empirically the proposition that governments systematically respond to adverse shocks in their market borrowing rates by improving their …scal positions.Based on a vector autoregressive (VAR) model with a panel of 14 European countries and annual data from 1970 to 2011, it …nds a statistically signi…cant …scal policy response to exogenous changes in the cost of borrowing. A one percentage point rise in the cost of borrowing leads to a cumulative increase in the primary balance-to-GDP ratio of 1.9 percentage points after 10 years. However, the debt-to-GDP ratio is 1.0 percentage points higher 10 years after the shock, i.e. the budgetary response is insu¢ cient to compensate for the automatic debt-increasing e¤ect of higher borrowing costs. The impulse responses reveal that the …scal response is not immediate, with a signi…cant consolidation appearing only two years after the shock. A decomposition of the primary budget balance into its revenue and expenditure components shows that almost all the adju...

Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use:Documents in EconStor may be saved and copied for your personal and scholarly purposes.You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public.If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

We investigate whether the response of the macro-economy to oil price shocks undergoes episodic changes. Employing a regime-switching vector autoregressive model we identify two regimes that are characterized by qualitatively different patterns in economic activity and inflation following oil price shocks in the euro area. In the normal regime, oil price shocks trigger only limited and short-lived adjustments in these variables. In the adverse regime, by contrast, oil price shocks are followed by sizeable and sustained macroeconomic fluctuations, with inflation and economic activity moving in the same direction as the oil price. The responses of inflation expectations and wage growth point to second-round effects as a potential driver of the dynamics characterising the adverse regime. The systematic response of monetary policy works against such second-round effects in the adverse regime but is insufficient to fully offset them. The model also delivers (conditional) probabilities for being (staying) in either regime, which may help interpret oil price fluctuations -and inform deliberations on the adequate policy response -in real-time.JEL Classification: E31, E52, C32

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