Sovereign Bond Market Fragmentation and Monetary Policy in the Euro Area

Résumé

This paper studies how sovereign bond market fragmentation shapes the transmission of monetary policy and its cross-country heterogeneity in the euro area. We show that contractionary monetary policy has strong dampening effects on real activity and prices in periods of low fragmentation, while the effects are substantially attenuated in high-fragmentation regimes. We find no evidence that fragmentation systematically alters the cross-country dispersion of monetary policy effects. These results are robust to controlling for alternative potential state-dependencies, different fragmentation and policy shock measures, and an extended sample period.