How Effective Has ECB’s Monetary Policy Been during Crisis? The Case of CDS Spreads and Bond Yields

Abstract

In this paper, the first Principal Component is extracted from weekly sovereign Eurozone CDS spreads and bond yields, and is then used in a regression with ECBs weekly holdings on three programs used during the EU crisis as explanatory variables. The monetary policy measures adopted by the ECB during the escalation of the EU financial crisis seem to have a statistically significant and negative effect on the CDS spreads and Bond Yields of the Eurozone countries. To the extent that the level of the CDS spreads and sovereign yields reflects market risks, default risk, and uncertainty, the significant and negative effect indicates that the measures adopted by the ECB were successful in reducing uncertainty in Eurozone markets.