| June 2023 |
This paper estimates the effects of monetary policy on sovereign risk. We use proprietary intraday credit default swap (CDS) data on five European countries and identify the effects of monetary policy on CDS premia in a small time window around the European Central Bank (ECB) monetary policy announcements. We construct monetary policy surprises for the press release and conference windows separately and show that there are two channels with effects of opposite sign. We then use stock price surprises to disentangle and interpret the two effects in terms of a standard monetary policy channel, in which CDS premia and interest rates co-move positively, and an information channel, in which they co-move negatively. We find that the information channel is quantitatively the most important. The results are robust across samples, maturities of CDS, and model specifications.