Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/263774 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9844
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We build a no-arbitrage model of the yield curves in a heterogeneous monetary union with sovereign default risk, which can account for the asymmetric shifts in euro area yields during the Covid-19 pandemic. We derive an affine term structure solution, and decompose yields into term premium and credit risk components. In an extension, we endogenize the peripheral default probability, showing that it decreases with central bank bond-holdings. Calibrating the model to Germany and Italy, we show that a "default risk extraction" channel is the main driver of Italian yields, and that flexibility makes asset purchases more effective.
Subjects: 
sovereign default
quantitative easing
yield curve
affine model
Covid-19 crisis
ECB
pandemic emergency purchase programme
JEL: 
E50
G12
F45
Document Type: 
Working Paper
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