Systemic Risk Spillovers Across the EURO Area

The high degree of financial contagion across the Euro area during the sovereign debt crisis highlighted the importance of systemic risk. In this paper we employ a Global VAR (GVAR) model to analyse the systemic risk spillovers across the Euro area and to assess their role in the transmission of monetary policy. The results indicate a strong interconnectedness among core countries and also that peripheral economies have a disproportionate importance in spreading systemic risk. A systemic risk shock results in economic slowdown domestically and causes negative spillovers to the rest of the EMU economies. To examine how monetary policy impacts systemic risk, we incorporate high-frequency monetary surprises into the model. We find evidence of the risk-taking channel during normal times, whereas the relationship is reversed in the period of the ZLB with expansionary shocks to result in a more stable financial system. Our findings indicate that the signalling channel is the main driver of this effect and that the initiation of the QE program boosts the economic activity but results in higher systemic risk. Finally, our results suggest that spillovers play an important role in the transmission of the monetary policy and that there is evidence of significant heterogeneity amongst countries’ responses with core countries to benefit the most from changes in monetary policy.