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The ECB's OMTs: A tale of governments, investors, and the central bank

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  • Cassola, Nuno
  • Jorge, José

Abstract

This paper analyses official financial assistance via ESM programmes, with and without the ECB's OMTs. As long as macroeconomic imbalances are small, ESM stand-alone programmes galvanize creditors into rolling over their loans, alleviate the liquidity crisis and help the country to implement adjustment policies. Yet the impact of fiscal consolidation and structural reforms is likely to be recessionary in the short run, since these reforms take a long time to pay off. Recessionary effects raise strategic uncertainty in the roll-over decisions of creditors, thus reducing the effectiveness of ESM liquidity assistance. With large imbalances, liquidity problems can only be overcome with credible and sizable official assistance. Adding OMTs to an ESM programme mitigates the policy dilemma, but does not fully restore investor confidence when macroeconomic imbalances are too large.

Suggested Citation

  • Cassola, Nuno & Jorge, José, 2016. "The ECB's OMTs: A tale of governments, investors, and the central bank," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 94-116.
    • Handle: RePEc:eee:jimfin:v:65:y:2016:i:c:p:94-116
    DOI: 10.1016/j.jimonfin.2016.03.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Outright Monetary Transactions; ECB; IMF; Debtor adjustment; Coordination problems; European sovereign debt crisis;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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