Sovereign debt markets and resilience in a heterogeneous union On the interaction of European economic and national fiscal policies

This dissertation examines the interaction between sovereign bond markets and EMU policies, focusing on the ECB’s monetary policy and ESM loans. The first chapter, examines the impact of the ECB's unconventional monetary policy measures, particularly its asset purchase programs, on interest rate dynamics surrounding sovereign bond auctions in the Eurozone.
The second chapter presents a novel estimation method that leverages supervised learning to address the limitations of traditional instrumental variable estimation methods in nonlinear scenarios. The proposed nonparametric supervised learning framework extracts exogenous variation in instruments in potentially nonlinear fashion. Additionally, a formal testing procedure is introduced, utilizing conformal inference to assess the strength of instruments.
The third chapter focuses on the determinants of primary market yields for Spanish sovereign bonds, with particular attention to the role of ESM loans. Findings reveal that higher central bank holdings lower short-term yields but increase medium-term yields, likely reflecting market expectations of future policy adjustments. Greater involvement by the ESM raises yields across all maturities, likely reflecting a long-term effect where investors perceive the official loan as an additional cost. However, the impact on issuance costs remains minimal.
The final chapter introduces a central fiscal capacity design within the EMU to address Eurozone-wide, national, and regional shocks. The model employs a multilevel Bayesian factor model, enabling a decomposition of regional economic growth, and optimizes counter-cyclical transfers to stabilize regional growth. The results show that the CFC can provide substantial stabilization, while also minimizing political and economic risks typically associated with fiscal transfers.