Sovereign spreads in the Euro area: Cross border transmission and macroeconomic implications

Large movements in sovereign spreads were at the heart of the euro crisis. This paper builds a new high-frequency narrative dataset of country specific events in the crisis period to identify shocks to sovereign spreads that are orthogonal to the economy. It finds that an increase in sovereign spreads has a contractionary macroeconomic impact with transmission running through a deterioration in private financial conditions. Moreover, the market reactions to foreign events explains a meaningful share of the variation in a sovereign’s cost of borrowing during the crisis.