The ECB and the bond market

This paper is an investigation into the factors that determine long-term interest rates in the Euro area. We measure long rates in the Euro area with the yield on 10-year German benchmark government bonds: we thus abstract from credit and liquidity spreads that vary both among Euro bonds issued by different governments and between corporate and sovereign bonds. We are interested in understanding to what extent---if at all---and through which channels the transition to a monetary union has affected European long rates. In particular we are interested in understanding whether it has affected the comovement of U.S. and European yields. Why is this relevant? Because long rates incorporate long-term inflation expectations and expectations on future monetary policy and thus provide a direct assessment of the credibility of a central bank's inflation target.