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 introduces a new measure of labor market slack to estimate the slope of the Phillips curve. The measure is based on business surveys of perceived labor shortages and is available at the sub-sector-country level. This granularity enables panel estimation with interactive fixed effects, which flexibly controls for unobserved common components related to inflation expectations and supply-side factors allows heterogeneous responses across units. Estimates for the euro area result in a significantly steeper Phillips curve than those obtained using conventional measures and standard empirical specifications.