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The instability of the market for government bonds in the EMU

Author

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  • Joern Kleinert

    (University of Graz, Austria)

Abstract

The introduction of the Transmission Protection Instrument is the latest evidence, that the EMU is confronted with unstable markets for government bonds. Based on a parsimonious model of the government bond market, I argue, that this results from the introduction of the euro, which has homogenized government bonds. Now, several easily substitutable bonds are traded at the same time. Investors are sorted according to return and risk instead of along currencies. This self-selection, however, creates instability in crises. Price convergence and sorting characterized the first decade of the euro, instability the second.

Suggested Citation

  • Joern Kleinert, 2023. "The instability of the market for government bonds in the EMU," Graz Economics Papers 2023-02, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2023-02
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    More about this item

    Keywords

    Financial markets; assets differentiation; interest rates.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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