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PEPP and NGEU: Short-term Reactions to the Monetary and Fiscal Policy Paradigm Shift in Light of the Lagarde Gaffe

This paper examines the short-term financial market reactions of four issuer-specific gauges for different euro area countries in relation to PEPP (Pandemic Emergency Purchase Programme) as well as NGEU (Next Generation EU) events in 2020 using event-based regressions. In addition, the Lagarde gaffe (“. . . we are not here to close spreads.”) on 12/3/2020 is taken into account. The gauges are the ten-year bond yield, credit spread, CDS spread and CDS-bond basis. The results suggest that the PEPP and the NGEU seem to have been effective in principle, especially for countries with a high sovereign debt ratio. However, the reactions of these countries’ gauges to the Lagarde gaffe indicate that shifting away from the European Central Bank’s “whatever it takes” stance will prove to be extremely difficult. This is highly relevant in the context of the current battle against high inflation rates in the euro area.