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Authors
Advisor(s)
Abstract(s)
We assess how countries’ fiscal policies during COVID-19 pandemic influenced the effects of
the Pandemic Emergency Purchase Programme (PEPP) on sovereign bond Option-Adjusted
Spreads. Using a cross-sectional regression model with country and time-fixed effects, we
analyse a sample of 1,368 euro-denominated sovereign bonds issued between Q1:2018 and
Q1:2022 in 19 Eurozone countries. We consider the PEPP net purchases by country, and the
fiscal policy is measured through changes in debt-to-GDP ratio and net lending/borrowing as a
percentage of GDP. The results indicate that PEPP’s effectiveness in reducing spreads was
strongly conditional on fiscal conditions, and then fiscal fundamentals condition the
effectiveness of ECB interventions. In high-debt countries, PEPP did not lower spreads, which
suggests that fiscal concerns remained dominant. PEPP was more effective in low-debt
countries, but its effects diminished as the level of debt increased, which suggest rising fiscal
risks. Furthermore, eligibility status was more important in economies with low debt levels,
where eligible bonds were seen as riskier assets. Finally, the results suggests that PEPP’s
effectiveness was stronger for higher-rated bonds, longer-maturity bonds, and central
government bonds, in fiscally sound countries.
Description
Keywords
ECB PEPP Unconventional monetary policy Fiscal policy Sovereign bond yields COVID-19 pandemic
Pedagogical Context
Citation
Afonso, António e Ferreira, Jorge Braga (2025). "The ECB’s pandemic emergency purchase programme and fiscal policy: synergies or conflict?". REM Working paper series, nº 0378/2025
Publisher
ISEG - REM (Research in Economics and Mathematics)