Sovereign bond purchases and risk-sharing arrangements: Implications for monetary policy

The design of the euro area Quantitative Easing (QE) programme raises the question of whether insuficient liquidity in the bond markets will reduce the impact of the programme and lead to market volatility. While estimates suggests that scarcity of around €102 billion may arise over the life of the programme, to date the QE programme has met its monthly targets and bond market volatility has been managed. Questions also arise in respect of the fact that risk is not fully shared on up to €738.4 billion to be purchased over the life of the programme. Partial risk sharing raises the spectre of defaulting central banks exiting the euro system, and existing members being unwilling to bear associated costs, and thus the future of the euro area. However, estimations suggest that, at present, all national central banks should be able to bare losses stemming from sovereign debt purchases under the current round of QE

Explaining Exchange Rate Movements in New Member States of the European Union: Nominal and Real Convergence

This paper uses the univariate and bivariate structural VAR variance framework to quantify real and nominal exchange rate volatility in the selective New Member States of the European Union, and identify factors responsible for movements of those rates. The scale and the nature of nominal and real exchange rate volatility are tightly linked to fulfilment of Maastricht criteria, real convergence, and the effectiveness of the nominal exchange rate in absorbing asymmetric real shocks. Given that there is no consensus on the appropriate definition of real convergence, and since the degree of real exchange rate volatility reflects the scale of idiosyncratic shocks, as well as overall flexibility of the economy to adjust to these shocks, this paper measures the degree of real convergence by the degree of real exchange rate variability. The results indicate that (i) real asymmetric shocks are not insignificant when compared with the poorer Old Member States of the European Union (ii) the nominal exchange rates, in general, do play a stabilising role, and that (iii) nominal shocks, on average, do not move real exchange rates. Therefore, based on the analysis conducted in this paper, it appears that among the New Member States, only Estonia and Slovenia are ready to give up monetary and exchange rate independenceExchange Rate Volatility, Convergence, European Monetary Integration, Structural Vector Autoregression, Heteroskedasticity, Small-sample Confidence Intervals