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Stabilising market expectations through a market tool: a proposal for an enhanced TPI

Author

Listed:
  • Massimo Amato

    (Bocconi University)

  • Everardo Belloni

    (Polytechnic of Milan)

  • Carlo A. Favero

    (Bocconi University and CEPR)

  • Lucio Gobbi

    (University of Trento)

  • Francesco Saraceno

    (OFCE-SciencesPo
    LUISS University)

Abstract

This paper puts forward a proposal to complete the ECB Transmission Protection Instrument (TPI) with the aim of making it more effective in anchoring the yields of European sovereign debts to Member States’ fundamentals. We use a model in which yields fluctuate within bands, which we specify following two alternative approaches: stochastic and deterministic. The resulting fluctuation's interval represents the range of yields that can be seen as justified by Member States’ fundamentals; yields outside the band would instead trigger the ECB intervention as foreseen by the TPI. The proposal minimizes the risk of moral hazard, as the fluctuation bands vary as each country's creditworthiness changes. Moreover, the proposal is directly implementable with existing Treaties.

Suggested Citation

  • Massimo Amato & Everardo Belloni & Carlo A. Favero & Lucio Gobbi & Francesco Saraceno, 2024. "Stabilising market expectations through a market tool: a proposal for an enhanced TPI," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 41(2), pages 597-615, July.
    • Handle: RePEc:spr:epolit:v:41:y:2024:i:2:d:10.1007_s40888-023-00302-1
    DOI: 10.1007/s40888-023-00302-1
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    References listed on IDEAS

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    1. Massimo Amato & Francesco Saraceno, 2022. "Squaring the circle: How to guarantee fiscal space and debt sustainability with a European Debt Agency," BAFFI CAREFIN Working Papers 22172, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Giudice, Gabriele & de Manuel Aramendía, Mirzha & Kontolemis, Zenon & Monteiro, Daniel P., 2019. "A European safe asset to complement national government bonds," MPRA Paper 95748, University Library of Munich, Germany.
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    More about this item

    Keywords

    TPI; European debt agency; Safe asset; Eurobonds; Public debt; Financial stability;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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