WO R K I N G PA P E R S E R I E S N O 3 / F E B R U A RY 0 FISCAL POLICY EVENTS AND INTEREST RATE SWAP SPREADS: EVIDENCE FROM THE EU by António Afonso and Rolf Strauch WO R K I N G PA P E R S E R I E S N O 3 / F E B R U A RY 0 FISCAL POLICY EVENTS AND INTEREST RATE SWAP SPREADS: EVIDENCE FROM THE EU1 by António Afonso2 and Rolf Strauch In 2004 all ECB publications will feature a motif taken from the €100 banknote This paper can be downloaded without charge from http://www.ecb.int or from the Social Science Research Network electronic library at http://ssrn.com/abstract_id=515065 We are grateful to Manfred Kremer, José Marin, Stephan Monissen, Ludger Schuknecht, Jürgen von Hagen, an anonymous referee, participants at an internal ECB seminar, and at the Tor Vergata Conference on Banking and Finance for helpful comments, Gerhard Schwab and Anna Foden for able research assistance, Ioana Alexopoulou and Jorge Sicilia for helping us with data and JP Morgan for making data on CDS rates available to us All remaining mistakes are ours.The opinions expressed herein are those of the authors and not necessarily reflect those of the author’s employers or of the ECB European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany, email: antonio.afonso@ecb.int ISEG/UTL - Technical University of Lisbon, R Miguel Lúpi 20, 1249-078 Lisbon, Portugal, email: aafonso@iseg.utl.pt European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany, email: rolf.strauch@ecb.int © European Central Bank, 2004 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main, Germany Telephone +49 69 1344 Internet http://www.ecb.int Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved Reproduction for educational and noncommercial purposes is permitted provided that the source is acknowledged The views expressed in this paper not necessarily reflect those of the European Central Bank The statement of purpose for the ECB Working Paper Series is available from the ECB website, http://www.ecb.int ISSN 1561-0810 (print) ISSN 1725-2806 (online) CONTENTS Abstract Non-technical summary Introduction Fiscal policy events in 2002 2.1 A chronology of the year 2.2 Capital market’s view of the Stability and Growth Pact Measurement of default risk and stylised facts about yields and swap spreads 13 15 3.1 Measuring default risk 15 3.2 Developments in 2002 18 3.3 Stylised facts for selected fiscal policy events 22 Analytical framework 26 4.1 Model specification 28 4.2 Estimation results and discussion 30 4.3 Testing anticipation and persistence 35 4.4 Additional evidence from CDS 38 Conclusion 39 Appendices 41 References 44 Annex 45 European Central Bank working paper series 64 ECB Working Paper Series No 303 February 2004 Abstract In this paper we assess the importance given in capital markets to the credibility of the European fiscal framework We evaluate to which extent relevant fiscal policy events taking place in the course of 2002 produced a reaction in the long-term bond segment of the capital markets Firstly, we identify the fiscal policy events and qualitatively assess the views of capital market participants Secondly, we estimate the impact of these fiscal events on the interest rate swap spreads, which is our measure for the risk premium According to our results the reaction of swap spreads, where it turned out to be significant, has been mostly around five basis points or less JEL: C22; G15; H30 Keywords: fiscal policy events; Stability and Growth Pact; interest rate swap spreads ECB Working Paper Series No 303 February 2004 Non-technical summary During 2002 the Stability and Growth Pact (SGP) was put to a test due to the implementation of the surveillance process and the discussion about the framework itself in the context of the economic slowdown endured by euro area economies The fiscal policy events that occurred in 2002 challenged the credibility of the European fiscal framework Therefore, they present a first opportunity to assess how capital markets react when the SGP is put under stress and that is the purpose of this paper We assess some stylised facts on long-term interest rates, using weekly and daily data Then we explore how these events were interpreted in capital markets by reviewing weekly notes and newsletters of four major investment banks for 2002, and we provide a chronology of major fiscal policy events throughout the year The fiscal policy events are classified either as country specific actions and decisions related to the implementation of the surveillance procedures (“type 1” fiscal events), or as announcements of policy targets and discussions on the European institutional framework (“type 2” fiscal events) The relation of some of these selected fiscal events with long-term government yields, the implied break-even inflation rate, and interest rate swap spreads is then discussed In the second part of the paper we estimate reaction of interest rate swap spreads for the European Union countries to fiscal policy events using a SUR approach Interest rate swap spreads are defined as the difference between the interest rate of the fixed leg of the 10-year interest rate swap and the 10-year government bond yield The estimations are carried out using daily data ECB Working Paper Series No 303 February 2004 Our results indicate only a significant reaction of interest rate swap spreads to some policy events Among others, the rumours of the early warning for Portugal and Germany on 17 January led to a decrease of the swap spread for Portugal, pointing to increasing concerns about fiscal developments In contrast, when the Council declared that Portugal has an excessive deficit on November, swap spreads increased both for Portugal and Germany indicating a possible positive confidence effect Furthermore, the change in swap spreads, when significant, has been mostly five basis points or less, and not exceeding ten basis points according to our estimates Using moving window regressions around policy events, we cannot detect any persistence of the market reaction in terms of a continuous upward or downward shift of the swap spread after a fiscal policy event, but our estimates suggest an anticipation effect in two instances The main message of our paper is therefore the lack of a strong reaction of the default risk premium in long-term government interest rates to the identified fiscal policy events in 2002, even if some specific events had a temporary and limited impact on swap spreads ECB Working Paper Series No 303 February 2004 Introduction The process of European integration that culminated in the European Monetary Union was based on the belief that fiscal discipline is necessary for a functioning monetary union Since the monetary union would allow members to free-ride on the common monetary policy by running excessive deficits and increasing debt ratios, a European fiscal policy framework was adopted setting deficit and debt limits for EU member states and installing an elaborated surveillance procedure The main thrust of the European fiscal framework, coupled with no bailout and no monetary financing clauses, is to ensure the sustainability of public finances since high or rapidly increasing debt levels in one Member State could have several externalities on others Due to the monetary union, government securities would be more perfect substitutes and large supply of government securities could raise the costs of borrowing for other governments Moreover, unsustainable public finances could raise pressure on the central bank to monetize these liabilities Finally, high debt levels in the extreme could lead to default – partially or fully, either on interest payments or on the principal – with repercussions in the banking sector The ECB could be forced to step in and similarly monetize government debt if this would spark a financial crisis The different implications of high government debt and unsustainable public finances should be reflected in prices for government securities The existence and implementation of the European fiscal framework should therefore have a twofold effect First, the credibility of the European fiscal framework and its ability to deter “excessive” deficits and debt in the perception of market participants generally affect future risks associated with liabilities of all member states Second, the surveillance process could reveal information to market participants when valuing individual government liabilities Either due to the perception of the credibility of the framework or the information content of the surveillance procedure, these budgetary institutions should affect the risk component included in government bond yields In 2002, the Stability and Growth Pact (SGP) was put to a test due to the implementation of the surveillance process and the discussion about the framework ECB Working Paper Series No 303 February 2004 itself in the context of the economic slowdown The fiscal events that occurred in 2002 challenged the credibility of the European fiscal framework They present therefore a first opportunity to assess how capital markets react when the SGP is put under stress We address this issue by analysing whether the long-term bond segment reacts to the worsening of fiscal positions in some countries and/or to the criticisms made to the SGP fiscal rules As a starting point, we look at publications from investment banks and at the development of interest rate swap spreads around key fiscal policy events The euro interest rate swap spread seems to be a good indicator of the relative risk of private versus government long-term bonds versus the private inter-bank market The main result of our review of investment bank newsletters and notes is that market participants closely observe and contribute to the debate on the SGP and its implementation But they not share a unanimous view on specific aspects of institutional credibility and the optimal implementation Correspondingly, we only find a significant reaction in the interest rate swap spread to a few policy events In those cases, the reaction was sizeable and interestingly pointed into different directions The results suggest that the overall debate on the Pact in Autumn has actually created some uncertainty about its future, and that any action against member states was eventually assessed as “a credibility yielding event”, rather than information revealing higher country risks We not find any persistent impact of policy events on the level of spreads The remainder of the paper is organised as follows Section selects and discusses the relevant fiscal policy events of 2002 Section addresses the measurement of default risk and examines the stylised facts of some of the proposed fiscal events Section presents the parametric analysis and discusses the several results Section concludes the paper Fiscal policy events in 2002 In 2002 the SGP was put to a test Due to the economic slowdown and lack of fiscal consolidation in previous years, some countries still had not achieved a medium-term position close to balance or in surplus Later on, several of those countries came very ECB Working Paper Series No 303 February 2004 close to or even breached the 3% deficit to GDP limit for excessive deficits set in the Maastricht Treaty Thus two developments, closely intertwined, prevailed during the year 2002 First, the procedures specified in the SGP and in the Maastricht Treaty became relevant and had to be implemented for the first time for Portugal and for Germany Secondly, as governments felt the restraint from the SGP and as the implementation process proceeded, a debate emerged on the implementation of the Pact and the criteria defined therein The public debate and the implementation of the surveillance procedures are marked by certain key events, which should have figured into the public perception of the credibility of the Pact or revealed some information on the state of public finances in member states 2.1 A chronology of the year The developments in 2002 started with the Commission’s recommendation for an early warning when it became apparent that Germany and Portugal would deviate significantly from the envisaged consolidation paths and would be close to the 3% of GDP limit for the deficit When the Commission launched its annual review of public finances in Member States, rumours spread out on 17 January that it was considering an early warning to Germany and Portugal This early warning was then recommended officially by the European Commission on Wednesday 30 January, as expected since Commissioner Solbes had clearly indicated his intention to launch the procedure beforehand After the Commission launched the initiative, a debate emerged of whether the early warning should be issued Eventually, European governments abstained from an early warning Eventually the ECOFIN Council decided on 12 February to close formally the procedure without issuing any early warning since Germany and Portugal renewed their firm commitment to their consolidation plans and medium-term targets This gave rise to a more general discussion on the credibility of the Pact Over the course of the summer, various setbacks took place concerning the attainment of a close to balance position in several countries France and Italy revealed budget plans indicating that they planned to deviate from their previously announced consolidation plans President Chirac had proposed drastic tax cuts in his electoral ECB Working Paper Series No 303 February 2004 4.4 Additional evidence from CDS We also assess the responsiveness of credit default swaps (CDS) to the aforementioned fiscal policy events.31 CDS rates have been used as measures of default risk in other studies For instance, Hull, Predescu and White (2003) report that CDS spread changes tend to anticipate negative rating announcements (one might also think of “adverse” fiscal policy events) using a sample of 1,599 entities, including corporations, sovereigns and quasi-sovereigns In Figure 14 we present the evolution of the 10-year CDS in basis points, in the fourth quarter of 2002, for the relevant countries We include Austria as a control country that in principle should have been less affected by country specific fiscal events The data that we got for CDS basically show nearly no changes for the first three-quarters Figure 14 10-year CDS (2002: Sep 2-Dec 31) 25 basis points 20 15 10 E VE NT S IT A LY F R A NC E P OR T UG A L A US T R IA 12/31 12/26 12/21 12/16 12/11 12/6 12/1 11/26 11/21 11/16 11/11 11/6 11/1 10/27 10/22 10/17 10/12 10/7 10/2 9/27 9/22 9/17 9/12 9/7 9/2 GE R M A NY Source: JPMorgan 31 This contract provides insurance against default by a particular company or sovereign entity The issuer is known as the reference entity and a default by the issuer is known as a credit event The buyer of the insurance makes periodic payments to the seller and in return obtains the right to sell a bond issued by the reference entity for its face value if a credit event occurs This seems to be particularly true when extreme declines in credit quality happen within a short period of time 38 ECB Working Paper Series No 303 February 2004 of 2002, but then started to increase in the fourth quarter Even if one considers the low liquidity of the CDS market for sovereigns, some additional information can be obtained concerning the markets participants responsiveness to the policy events that occurred in 2002 Some long and short-term developments depicted in Figure 14 are worth noticing First, Germany looses its position as the country with the lowest rate and at the end of the sample period ranks third, with France and Austria having lower rates At the same time, Portugal looses some ground relative to Italy, which has slightly lower rates at the end of the sample Second, CDS rates increased for Germany and France, right after the 17 October, when the President of the EC conveyed his comments on the SGP In addition, there was an increase in the CDS rate of all the countries depicted in Figure 14 just before and after the declaration of the Council that Portugal had an excessive deficit (5 November) This contradicts the result we found in our SUR analysis since a rise in the CDS rates can be interpreted as implying a rise in the perceived risk, assigned by market participants, to those countries’ sovereign debt The evidence for the other fiscal policy events captured is less clear cut Conclusion In 2002, the Stability and Growth Pact was put to a test due to the implementation of the surveillance process and the discussion about the framework itself in the context of the economic slowdown This study evaluates to which extent policy events taking place in the course of 2002 produced a reaction in the long-term bond segment of the capital markets First, we qualitatively study the views of market participants reviewing their publications Then simple statistics and econometric estimates are used to assess the impact of these events on the swap spread, our measure for the default risk premium Publications of investment banks show that market participants are not only perceptive to the debate on and the implementation of the SGP, but in some cases they ECB Working Paper Series No 303 February 2004 39 even intend to contribute to the debate Although there is unanimous agreement that some form of a European fiscal framework is useful, markets’ views on specific credibility aspects and how the Pact ought to be implemented differ widely In our parametric analysis, we concomitantly not find a clear capital market reaction for various events Since we not have data on individual trades, our results not allow discriminating whether the lack of reaction was due to neglect or opposing assessments Nevertheless, we find some effects of political events and discussions on the swap spread Interestingly, they point in different directions in the first quarter of 2002 and in the last quarter The credibility of the framework as such may have been negatively affected by the public debate The rumours of the early warning for Portugal and Germany on 17 January did seem to actually have decreased the swap spread for Portugal pointing to increasing concerns about fiscal developments By contrast, for the event of November, when the Council declared that Portugal as an excessive deficit, there is some statistical evidence of an increase in the swap spreads both for Portugal and Germany, which indicates a possible confidence effect Finally one has to restate once more that the reaction of swap spreads, when significant, has been sizeable – mostly basis points or less, but not exceeding 10 basis points – according to our estimates The failure to find a significant impact in most cases has not been an anticipation effect, since procedural events are generally not associated with a fall of spreads beforehand Moreover, we could not detect any persistence of the market reaction in terms of a continuous upward or downward shift of the swap spread after an event One could have expected such a reaction if the credibility of the European institutional framework would have been seriously threatened and market participants would have predicted a serious misalignment of public finances in the future.32 Summarising, the main finding of our paper is the lack of a persistent and systematic reaction of the default risk premium to the identified fiscal policy events during 2002, even if some specific events had a significant, temporary impact on swap spreads 32 40 This is also the view supported by a recent EC report (see EC (2003)) ECB Working Paper Series No 303 February 2004 Appendix – Descriptive statistics Table A1.1 Descriptive statistics for 10 years daily government bond yields (2002) Mean (%) 4.941 4.980 4.775 5.053 4.957 4.862 4.928 4.855 5.103 4.994 5.018 4.886 5.002 5.300 4.603 AT BE DE DK FI FR ES GB GR IE IT NL PT SE US Median (%) 5.008 5.051 4.825 5.073 5.010 4.902 4.994 4.891 5.203 5.003 5.072 4.935 5.059 5.286 4.799 Maximum (%) 5.445 5.480 5.256 5.502 5.475 5.339 5.433 5.334 5.602 5.505 5.511 5.389 5.489 5.770 5.426 Minimum (%) 4.244 4.304 4.175 4.443 4.276 4.237 4.252 4.360 4.429 4.280 4.407 4.204 4.315 4.685 3.567 Standard Deviation 0.345 0.341 0.319 0.283 0.330 0.318 0.342 0.293 0.342 0.332 0.328 0.345 0.333 0.282 0.534 Skewness Kurtosis -0.225 -0.231 -0.145 -0.140 -0.238 -0.147 -0.188 -0.021 -0.272 -0.164 -0.204 -0.195 -0.272 0.008 -0.261 1.690 1.662 1.648 1.813 1.781 1.669 1.645 1.662 1.679 1.772 1.665 1.672 1.782 1.869 1.624 Source: Reuters Table A1.2 Correlation matrix for daily government bond yields (2002) AT AT BE DE DK FI FR ES GB GR IE IT NL PT SE US BE DE DK 0.987 0.995 0.965 0.994 0.997 0.999 0.974 0.997 0.955 0.996 0.999 0.995 0.940 0.924 0.985 0.978 0.986 0.983 0.986 0.970 0.987 0.964 0.982 0.986 0.987 0.953 0.937 0.966 0.993 0.997 0.995 0.986 0.992 0.951 0.996 0.996 0.991 0.944 0.927 FI 0.970 0.965 0.964 0.958 0.962 0.972 0.961 0.965 0.967 0.982 0.923 0.992 0.992 0.977 0.991 0.959 0.989 0.994 0.996 0.948 0.909 FR ES GB GR IE IT 0.997 0.981 0.993 0.951 0.997 0.998 0.991 0.942 0.919 0.974 0.996 0.952 0.997 0.998 0.992 0.936 0.925 0.968 0.938 0.977 0.976 0.973 0.943 0.919 0.951 0.993 0.996 0.993 0.932 0.930 0.947 0.956 0.959 0.971 0.913 NL PT SE US 0.997 0.989 0.994 0.934 0.941 0.944 0.926 0.921 0.914 0.899 Table A1.3 Descriptive statistics for 10 years daily interest rate swaps (2002) DK EU GB SE US Mean 5.230 5.014 5.239 5.542 5.150 Median 5.290 5.070 5.305 5.525 5.263 Maximum Minimum Std Dev Skewness 5.760 4.520 0.344 -0.155 5.480 4.365 0.317 -0.218 5.650 4.770 0.272 -0.165 6.020 4.930 0.288 -0.027 6.080 4.210 0.583 -0.124 Kurtosis 1.766 1.704 1.564 1.865 1.524 Table A1.4 Correlation matrix for 10-year daily interest rate swaps (2002) EU EU DK GB US SE DK 1.000 0.994 0.984 0.947 0.976 GB 1.000 0.978 0.933 0.977 US 1.000 0.954 0.960 SE 1.000 0.903 1.000 ECB Working Paper Series No 303 February 2004 41 Appendix – Unit root tests Table A2.1 Unit root tests (ADF), interest rate swap spreads Country Trend Austria Y Belgium Y Denmark Y Spain Y Finland N France Y United Kingdom N Germany Y Greece Y Ireland Y Italy Y Netherlands Y Portugal Y Sweden Y United States Y *** - Significant at 1% or less ** - Significant at 5% or less Drift Y Y Y Y Y Y N Y Y Y Y Y Y Y Y Lags 5 5 10 10 5 5 5 5 Test Statistic -5.33 *** -5.41 *** -4.71 *** -5.24 *** -3.17 ** -4.85 *** -1.10 -4.17 *** -6.45 *** -4.89 *** -4.21 *** -4.87 *** -4.13 *** -4.80 *** -4.62*** Table A2.2 Unit root tests (ADF), bid-ask spreads Country Trend Austria Y Belgium Y Denmark N Spain Y Finland Y France Y United Kingdom Y Germany Y Greece Y Ireland Y Italy Y Netherlands Y Portugal Y *** - Significant at 1% or less ** - Significant at 5% or less Drift Y Y Y Y Y Y Y Y Y Y Y Y Y Lags 5 5 5 5 5 10 Test Statistic -5.88*** -6.59*** -3.15** -4.93*** -4.72*** -5.75*** -6.41*** -6.69*** -7.41*** -4.94*** -7.04*** -5.22** -6.64*** Table A2.3 Unit root tests (ADF), other variables Variable Eurostoxx (implied volatility) US yield curve Trend Drift N N N N First differences Eurostoxx (implied volatility) Y Y US yield curve Y Y *** - Significant at 1% or less 42 ECB Working Paper Series No 303 February 2004 Lags 5 Test Statistic -0.44 -1.07 1 -7.18 -7.50 *** Appendix – Dummy values for “window” analysis Table A3.1 Example of value assignment to the dummy variables in the “window” estimates SUR t-8 t-7 t-6 t-5 t-4 t-3 t-2 t-1 … t-11 t-10 t-9 1 1 1 1 1 t+0 t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 … 0 0 0 0 0 0 0 1 1 1 1 1 0 0 0 0 0 0 0 0 1 1 1 1 0 0 0 0 0 0 … 0 0 0 0 0 1 0 0 0 0 0 0 10 0 0 0 0 0 1 0 0 0 0 0 0 11 0 0 0 0 0 0 0 0 0 0 0 0 12 0 0 0 0 0 0 1 0 0 0 0 0 13 0 0 0 0 0 0 1 0 0 0 0 0 14 0 0 0 0 0 0 1 1 0 0 0 0 20 0 0 0 0 0 0 1 1 1 1 1 0 21 0 0 0 0 0 0 1 1 1 1 1 0 … Note: t+0 is the date of the event ECB Working Paper Series No 303 February 2004 43 References Afonso, A (2003) “Understanding the Determinants of Government Debt Ratings: Evidence for the Two Leading Agencies,” Journal of Economics and Finance, 27 (1), 56-74 Alesina, A.; de Broeck, M.; Prati, A and Tabellini, G (1992) “ Default Risk on Government Debt in OECD Countries,” Economic Policy, 15, 427-451 Blanco, R (2001) “Euro Area Government Securities Markets: Recent Developments and Implications for Market Functioning,” Basle: BIS Papers No 12, pp 65-85 Bernoth, K.; von Hagen, J and Schuknecht, L (2003) “The Determinants of the Yield Differential in the EU Bond Market,” Bonn University, mimeo BIS (2003) Quarterly Review, International banking and financial market developments, March, Bank of International Settlements Codogno, L.; Favero, C and Missale, A (2002) “Yield Spreads in EMU Government Bonds,” Bocconi University, December, mimeo EC (2003) Quarterly Report on the Euro Area No I/2003, European Commission, March ECB (2001) The euro 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Steiner, M and Heinke, V (2001) “Event Study Concerning International Bond Price Effects of Credit Rating Actions,” International Journal of Finance and Economics, (3), 139-87 44 ECB Working Paper Series No 303 February 2004 Annex - Data sources The sources for the data used in the study are reported below, for each series 10-year government bond yields (Reuters) PT10YT=RR BE10YT=RR ES10YT=RR FR10YT=RR IE10YT=RR DE10YT=RR IT10YT=RR NL10YT=RR AT10YT=RR FI10YT=RR GR10YT=RR US10YT=RR GB10YT=RR SE10YT=RR DK10YT=RR Credit Default Swaps Source: JP Morgan 10-year interest rate swaps (Reuters) EURAB6L10Y= USDAM3L10Y= GBPSB6L10Y= SEKAB3S10Y= DKKAB6C10Y= stock market put and 10-year government call volatility bond, bid and ask prices (Bloomberg) (Reuters) RT.BM.AT.10Y.ASK EUROSTOXX RT.BM.AT.10Y.bid CALL IV RT.BM.be.10Y.ASK PUT IV RT.BM.be.10Y.bid RT.BM.de.10Y.ASK RT.BM.de.10Y.bid RT.BM.dk.10Y.ASK RT.BM.dk.10Y.bid RT.BM.es.10Y.ASK RT.BM.es.10Y.bid RT.BM.fi.10Y.ASK RT.BM.fi.10Y.bid RT.BM.fr.10Y.bid RT.BM.fr.10Y.ASK RT.BM.gb.10Y.bid RT.BM.gb.10Y.ASK RT.BM.gr.10Y.bid RT.BM.gr.10Y.ASK RT.BM.ie.10Y.bid RT.BM.ie.10Y.ASK RT.BM.it.10Y.bid RT.BM.it.10Y.ASK RT.BM.nl.10Y.bid RT.BM.nl.10Y.ASK RT.BM.pt.10Y.bid RT.BM.pt.10Y.ASK RT.BM.se.10Y.bid RT.BM.se.10Y.ASK RT.BM.us.10Y.bid RT.BM.us.10Y.ASK month interest rates (Reuters) USD3MZ=R SEK3MZ=R DKK3MZ=R GBP3MZ=R EUR3MZ=R ECB Working Paper Series No 303 February 2004 45 European Central Bank working paper series For a complete list of Working Papers published by the ECB, please visit the ECB’s website (http://www.ecb.int) 202 “Aggregate loans to the euro area private sector” by A Calza, M Manrique and J Sousa, January 2003 203 “Myopic loss aversion, disappointment aversion and the equity premium puzzle” by D Fielding and L Stracca, January 2003 204 “Asymmetric dynamics in the correlations of global equity and bond returns” by L Cappiello, R.F Engle and K Sheppard, January 2003 205 “Real exchange rate in an inter-temporal 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A look at the empirical evidence” by S Ejerskov, C Martin Moss and L Stracca, July 2003 245 “Money and payments: a modern perspective” by C Holthausen and C Monnet, July 2003 246 “Public finances and long-term growth in Europe – evidence from a panel data analysis” by D R de Ávila Torrijos and R Strauch, July 2003 247 “Forecasting euro area inflation: does aggregating forecasts by HICP component improve forecast accuracy?” by K Hubrich, August 2003 248 “Exchange rates and fundamentals” by C Engel and K D West, August 2003 249 “Trade advantages and specialisation dynamics in acceding countries” by A Zaghini, August 2003 250 “Persistence, the transmission mechanism and robust monetary policy” by I Angeloni, G Coenen and F Smets, August 2003 251 “Consumption, habit persistence, imperfect information and the lifetime budget constraint” by A Willman, August 2003 252 “Interpolation and backdating with a large information set” by E Angelini, J Henry and M Marcellino, August 2003 253 “Bond market inflation expectations and longer-term trends in broad monetary growth and inflation in industrial countries, 1880-2001” by W G Dewald, September 2003 48 ECB Working Paper Series No 303 February 2004 254 “Forecasting real GDP: what role for narrow money?” by C Brand, H.-E Reimers and F Seitz, September 2003 255 “Is the demand for euro area M3 stable?” by A Bruggeman, P Donati and A Warne, September 2003 256 “Information acquisition and decision making in committees: a survey” by K Gerling, H P Grüner, A Kiel and E Schulte, September 2003 257 “Macroeconomic modelling of monetary policy” by M Klaeffling, September 2003 258 “Interest rate reaction functions and the Taylor rule in the euro area” by P GerlachKristen, September 2003 259 “Implicit tax co-ordination under repeated policy interactions” by M Catenaro and J.-P Vidal, September 2003 260 “Aggregation-theoretic monetary aggregation over the euro area, when countries are heterogeneous” by W A Barnett, September 2003 261 “Why has broad money demand been more stable in the euro area than in other economies? A literature review” by A Calza and J Sousa, September 2003 262 “Indeterminacy of rational expectations equilibria in sequential financial markets” by P Donati, September 2003 263 “Measuring contagion with a Bayesian, time-varying coefficient model” by M Ciccarelli and A Rebucci, September 2003 264 “A monthly monetary model with banking intermediation for the euro area” by A Bruggeman and M Donnay, September 2003 265 “New Keynesian Phillips Curves: a reassessment using euro area data” by P McAdam and A Willman, September 2003 266 “Finance and growth in the EU: new evidence from the liberalisation and harmonisation of the banking industry” by D Romero de Ávila, September 2003 267 “Comparing economic dynamics in the EU and CEE accession countries” by R Süppel, September 2003 268 “The output composition puzzle: a difference in the monetary transmission mechanism in the euro area and the US” by I Angeloni, A K Kashyap, B Mojon and D Terlizzese, September 2003 269 “Zero lower bound: is it a problem with the euro area?" by G Coenen, September 2003 270 “Downward nominal wage rigidity and the long-run Phillips curve: simulation-based evidence for the euro area” by G Coenen, September 2003 271 “Indeterminacy and search theory” by N Giammarioli, September 2003 ECB Working Paper Series No 303 February 2004 49 272 “Inflation targets and the liquidity trap” by M Klaeffling and V López Pérez, September 2003 273 “Definition of price stability, range and point inflation targets: the anchoring of long-term inflation expectations” by E Castelnuovo, S Nicoletti-Altimari and D RodriguezPalenzuela, September 2003 274 “Interpreting implied risk neutral densities: the role of risk premia” by P Hördahl and D Vestin, September 2003 275 “Identifying the monetary transmission mechanism using structural breaks” by A Beyer and R Farmer, September 2003 276 “Short-term estimates of euro area real GDP by means of monthly data” by G Rünstler, September 2003 277 “On the indeterminacy of determinacy and indeterminacy" by A Beyer and R Farmer, September 2003 278 “Relevant economic issues concerning the optimal rate of inflation” by D R Palenzuela, G Camba-Méndez and J Á García, September 2003 279 “Designing targeting rules for international monetary policy cooperation” by G Benigno and P Benigno, October 2003 280 “Inflation, factor substitution and growth” by R Klump, October 2003 281 “Identifying fiscal shocks and policy regimes in OECD countries” by G de Arcangelis and S Lamartina, October 2003 282 “Optimal dynamic risk sharing when enforcement is a decision variable” by T V Koeppl, October 2003 283 “US, Japan and the euro area: comparing business-cycle features” by P McAdam, November 2003 284 “The credibility of the monetary policy ‘free lunch’” by J Yetman, November 2003 285 “Government deficits, wealth effects and the price level in an optimizing model” by B Annicchiarico, November 2003 286 “Country and sector-specific spillover effects in the euro area, the United States and Japan” by B Kaltenhaeuser, November 2003 287 “Consumer inflation expectations in Poland” by T Łyziak, November 2003 288 “Implementing optimal control cointegrated I(1) structural VAR models” by F V Monti, November 2003 289 “Monetary and fiscal interactions in open economies” by G Lombardo and A Sutherland, November 2003 50 ECB Working Paper Series No 303 February 2004 290 “Inflation persistence and robust monetary policy design” by G Coenen, November 2003 291 “Measuring the time-inconsitency of US monetary policy” by P Surico, November 2003 292 “Bank mergers, competition and liquidity” by E Carletti, P Hartmann and G Spagnolo, November 2003 293 “Committees and special interests” by M Felgenhauer and H P Grüner, November 2003 294 “Does the yield spread predict recessions in the euro area?” by F Moneta, December 2003 295 “Optimal allotment policy in the eurosystem’s main refinancing operations?” by C Ewerhart, N Cassola, S Ejerskov and N Valla, December 2003 296 “Monetary policy analysis in a small open economy using bayesian cointegrated structural VARs?” by M Villani and A Warne, December 2003 297 “Measurement of contagion in banks’ equity prices” by R Gropp and G Moerman, December 2003 298 “The lender of last resort: a 21st century approach” by X Freixas, B M Parigi and J.-C Rochet, December 2003 299 “Import prices and pricing-to-market effects in the euro area” by T Warmedinger, January 2004 300 “Developing statistical indicators of the integration of the euro area banking system” by M Manna, January 2004 301 “Inflation and relative price asymmetry” by A Rátfai, January 2004 302 “Deposit insurance, moral hazard and market monitoring” by R Gropp and J Vesala, February 2004 303 “Fiscal policy events and interest rate swap spreads: evidence from the EU” by A Afonso and R Strauch, February 2004 ECB Working Paper Series No 303 February 2004 51 ... hand scale) 1 2/1 3 1 1/2 2 1 1/0 1 1 0/1 0 0 9/2 0 0 8/3 0 0 8/0 9 0 7/1 9 0 6/2 8 0 6/0 7 0 5/1 7 0 4/2 6 0 4/0 5 0 3/1 5 0 2/2 2 0 2/0 1 5.3 0 1/1 1 20 Forward Rate (ri g th hand scale) Notes: The yield curve is the 10-year... 40 Swap spread (bp) 30 20 10 -10 Portugal Germany 0 4/1 2 0 4/1 1 0 4/1 0 0 4/0 9 0 4/0 8 0 4/0 7 0 4/0 6 0 4/0 5 0 4/0 4 0 4/0 3 0 4/0 2 0 4/0 1 -20 Events Note: Interest rate swap spreads are defined as 10-year swap. .. Events France UK 1 2/1 3 1 1/2 2 1 1/0 1 1 0/1 0 0 9/2 0 0 8/3 0 0 8/0 9 0 7/1 9 0 6/2 8 0 6/0 7 0 5/1 7 0 4/2 6 0 4/0 5 0 3/1 5 0 2/2 2 0 2/0 1 0 1/1 1 0.5 US Note: Expectations from break-even inflation rate = 10-year nominal bond