Research

Abstract: The literature established that a sovereign bond’s “convenience yield” premium diminishes when that country issues more debt. But how is this convenience yield affected when another country issues sovereign debt? Using high-frequency identification and debt management offices’ communication, we find that an increase in German or French debt reduces convenience yields across the eurozone. Spillovers to low-risk countries are one-for-one while those to riskier countries are smaller. To rationalize these findings, we develop a model with heterogeneous credit risk. Safe sovereign bonds are close substitutes to hedge against idiosyncratic risk, explaining large spillovers, while risky bonds are poor substitutes.

Abstract: This paper is the first to document the presence of non-linearities in the euro area’s sectoral New Keynesian Phillips curve using a granular measure of labor market tightness: the Perception of Labor Shortages (PLS). PLS captures firms’ perceived hiring frictions and proxies for marginal costs. Using a disaggregated dataset – spanning manufacturing sub-sectors across euro area’s countries from 1990 to 2024 – we show that inflation responds more strongly and more persistently to labor shortages when the labor market is tight. Our results show that a one percentage point increase in PLS raises producer price inflation between two to eight times more during tight labor markets, compared to normal conditions. We also find that labor shortages influence export price inflation non-linearly, both within and beyond the euro area. These findings underscore the risks the monetary authority bears by assuming a linear Phillips curve, offering critical insights for monetary policy design and inflationary pressure assessment.