anticipated monetary policy in canada some new evidence abstract in this note i examine the policy ineffectiveness proposition for canada using monthly income data due to milbourne et al 1988 i find that anticipated monetary policy altered the evolution of real output in canada recent work by ambler and phaneuf 1988 can be used to attribute this result to a purely new keynesian model of the business cycle although this inference is found to be fragile with respect to the choice of the level of significance used in the hypothesis tests

an econometric investigation of the monetary neutrality and rationality propositions from an international perspective t he combination of the natural rate of unemployment and the rational expectations hypotheses in macroeconomic models results in the now well known conclusion that anticipated short run monetary stabilization policies do not influence real economic variables this policy ineffectiveness proposition has been named the macro rational expectations mre hypothesis by modigliani 1977 as a result the implicit policy prescription is that a price level stabilization policy should be pursued the empirical validity of this conclusion is perhaps the central issue in modern stabilization theory barro 1977 1978 1981 barro and rush 1980 and leiderman 1980 have presented empirical evidence for the united states supporting this proposition however a number of recent studies have claimed that previous empirical results which support the finding that anticipated policy is neutral are flawed corrections of these problems often result in conflicting conclusions see small 1979 gordon 1979 and mishkin 1982 given the important implications of the mre hypothesis it is curious that almost all formal testing has been focused upon the united states while barro has suggested that a cross country study would be useful as far as we know only darby 1980 attempts to test whether anticipated changes in monetary policy are neutral across countries unfortunately his results suffer from problems caused by using generated regressors in addition he makes no attempt to test the individual implications of the mre hypothesis which encompasses the propositions that expectations are rational lad anticipated monetary policy does not matter in this paper we employ the methodology developed by mishkin to test the mre hypothesis in six countries canada germany italy japan the united kingdom and the united states the paper is divided into three major sections and a conclusion section ii briefly reviews mishkin s testing method in section iii the procedure employed to specify the money growth equation is discussed and these equations specified section iv presents and discusses the results of applying the method introduced in section ii in the conclusion the major findings are restated possible limitations discussed and extensions suggested

simple mechanisms to implement the core of college admissions problems abstract this paper analyzes simple mechanisms implementing subselections of the core correspondence of matching markets we provide a sequential mechanism which mimics a matching procedure for many to one real life matching markets we show that only core allocations should be attained when agents act strategically when faced with this mechanism we also provide a second mechanism to implement the core correspondence in subgame perfect equilibrium journal of economic literature classification numbers c78 d78

investor flows and the 2008 boom bust in oil prices this paper explores the impact of investor flows and financial market conditions on returns in crude oil futures markets i argue that informational frictions and the associated speculative activity may induce prices to drift away from fundamental values and may result in price booms and busts particular attention is given to the interplay between imperfect information about real economic activity including supply demand and inventory accumulation and speculative activity in oil markets furthermore i present new evidence that there were economically and statistically significant effects of investor flows on futures prices after controlling for returns in the united states and emerging economy stock markets a measure of the balance sheet flexibility of large financial institutions open interest the futures spot basis and lagged returns on oil futures the largest impacts on futures prices were from intermediate term growth rates of index positions and managed money spread positions moreover my findings suggest that these effects were through risk or informational channels distinct from changes in convenience yield finally the evidence suggests that hedge fund trading in spread positions in futures impacted the shape of term structure of oil futures prices this paper was accepted by wei xiong finance

a finite decentralized marriage market with bilateral search abstract i study a model in which a finite number of men and women look for future spouses via random pairwise meetings the central question is whether equilibrium marriage outcomes are stable matchings when search frictions are small the answer is they can but need not be for any stable matching there is an equilibrium leading to it almost surely however there may also be equilibria leading to an unstable matching almost surely a restriction to simpler strategies or to markets with aligned preferences rules out such equilibria however unstable even pareto dominated matchings may still arise with positive probability under those two restrictions combined in addition inefficiency due to delay may remain significant despite vanishing search frictions finally a condition is identified under which all equilibria are outcome equivalent stable and efficient

index investment and financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become incr

index investment and the financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become increasingly correlated with oil prices this trend has been significantly more pronounced for commodities in two popular commodity indices this finding reflects the financialization of the commodity markets and helps explain the large increase in the price volatility of non energy commodities around 2008

misrepresentation and stability in the marriage problem it has been shown previously that for two sided discrete markets of the kind exemplified by the marriage problem no strategy proof procedure for aggregating preferences into stable outcomes exists here it is shown that nash equilibrium misrepresentation of preferences nevertheless results in a stable outcome in terms of the true preferences when the aggregation procedure yields the optimal stable outcome in terms of the stated preferences for one side of the market journal of economic literature classification numbers 022 025 026 0 1984 academic

nonstationarities in stock returns the paper outlines a methodology for analyzing daily stock returns that relinquishes the assumption of global stationarity giving up this common working hypothesis reflects our belief that fundamental features of the financial markets are continuously and significantly changing our approach approximates the nonstationary data locally by stationary models the methodology is applied to the s p 500 series of returns covering a period of over seventy years of market activity we find most of the dynamics of this time series to be concentrated in shifts of the unconditional variance the forecasts based on our nonstationary unconditional modeling were found to be superior to those obtained in a stationary long memory framework and to those based on a stationary garch 1 1 data generating process

the role of unions in hiring procedures for job markets this paper studies simple hiring procedures for job markets we show that when agents act strategically only individually rational outcomes should be expected moreover if agents can form unions thereby gaining the possibility to commit on the decision to be chosen only stable allocations are implemented

nash implementation using undominated strategies we study the problem of implementing social choice correspondences using the concept of undominated nash equilibrium i e nash equilibrium in which no one uses a weakly dominated strategy we show that this mild refinement of nash equilibrium has a dramatic impact on the set of implementable correspondences our main result is that if there are at least three agents in the society then any correspondence which satisfies the usual no veto power condition is implementable unless some agents are completely indifferent over all possible outcomes many common welfare criteria such as the pareto correspondence and several familiar voting rules such as majority and plurality rules satisfy our conditions this possibility result stands in sharp contrast to the more restrictive findings with implementation in either nash equilibrium or subgame perfect equilibrium we present several examples to illustrate the difference between undominated nash implementation and implementation with alternative solution concepts

undominated nash implementation in bounded mechanisms we study implementation in undominated nash equilibrium by bounded mechanisms an undominated nash equilibrium is a nash equilibrium in which no agent uses a weakly dominated strategy a mechanism is bounded if every dominated strategy is dominated by some undominated strategy we identify necessary conditions and sufficient conditions for such implementation these conditions are satisfied in virtually all economic environments and are also satisfied by interesting correspondences from the social choice literature for economic settings we provide a particularly simple implementing mechanism for which the undominated equilibrium outcomes coincide with those obtained from the iterative elimination of weakly dominated strategies

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

maximal manipulation of envy free solutions in economies with indivisible goods and money abstract we consider the problem of the fair allocation of indivisible goods and money with non quasi linear preferences the purpose of the present study is to examine strategic manipulation under envy free solutions we show that under a certain domain richness condition each individual obtains the welfare level of his optimal envy free allocation by maximally manipulating the solutions this maximal manipulation theorem is helpful in analyzing the set of nash equilibrium allocations in the direct revelation games associated with a given envy free solution if an envy free solution satisfies a mild condition the set of nash equilibrium allocations in its associated direct revelation game coincides with that of envy free allocations

the directional volatility connectedness between crude oil and equity markets new evidence from implied volatility indexes in this paper we use a set of newly introduced implied volatility indexes to investigate the directional connectedness between oil and equities in eleven major stock exchanges around the globe from 2008 to 2015 the inference on the oil equity implied volatility relationships depends on diebold and yilmaz 2012 2014 2015 who proposed a set of directional measures that enable the dynamic and directional characterization of the relationships among financial variables we find uniform results across the sample countries indicating that the connectedness between oil and equity is established by the bi directional information spillovers between the two markets however we find that the bulk of association is largely dominated by the transmissions from the oil market to equity markets and not the other way around the pattern of transmissions is varying over the sample period however most of the linkages between oil and equities are established from the mid of 2009 to the mid of 2012 which is a period that witnessed the start of global recovery

cyclical properties of supply side and demand side shocks in oil based commodity markets abstract oil markets profoundly influence world economies through determination of prices of energy and transports using novel methodology devised in frequency domain we study the information transmission mechanisms in oil based commodity markets taking crude oil as a supply side benchmark and heating oil and gasoline as demand side benchmarks we document new stylized facts about cyclical properties of the transmission mechanism generated by volatility shocks with heterogeneous frequency responses our first key finding is that shocks to volatility with response shorter than one week are increasingly important to the transmission mechanism over the studied period second demand side shocks to volatility are becoming increasingly important in creating short run connectedness third the supply side shocks to volatility resonating in both the long run and short run are important sources of connectedness

hiring procedures to implement stable allocations abstract we implement the stable correspondence of a job matching market in subgame perfect equilibrium we use a simple sequential mechanism in which firms propose a salary to each worker first stage and then each worker accepts at most one proposal second stage moreover if agents preferences are additive this mechanism implements in subgame perfect equilibrium the firms optimal corre spondence when firms use undominated strategies finally we construct another simple sequential mechanism where the order of decisions is permuted and which implements the workers optimal correspondence when agents preferences are additive journal of economic literature classification numbers c78 d78

exogenous shocks and the spillover effects between uncertainty and oil price this paper evaluates the information spillover between equity related uncertainty and the oil price before and after the 2008 global financial crisis and the effects of exogenous shocks on the pattern of information spillover in particular we investigate mean and volatility spillovers between uncertainty and the oil price with and without exogenous shocks by using a bivariate egarch model there are two main findings in our paper first the evidence ensures significant information transmission between equity related uncertainty and the oil price and shows remarkable differences in transmission patterns before and after the crisis second the results show that exogenous shocks can intensify information transmission between oil prices and uncertainty in terms of both the mean and volatility spillover effects moreover exogenous shocks exhibit direct spillover effects on oil prices

does anticipated monetary policy matter another look recent work by mishkin 1982a 1982b and gordon 1982 tests the lucas sargent wallace henceforth lsw policy ineffectiveness proposition with econometric methods this work generally finds support for the alternative proposition that there is some short term influence of anticipated demand policy or anticipated money growth on output as mccallum 1982 has pointed out one difficulty with these studies is they presume movements in output and employment are best represented as stationary fluctuations around deterministic trends in constrast to evidence given by nelson and plosser 1982 which suggests these variables are nonstationary processes that have no tendency to return to a deterministic path if these series are nonstationary processes then the distribution theory implicit in the hypothesis tests of the gordon and mishkin studies does not apply and their results are open to question also as mccallum 1982 p 4 points out the methods of overcoming the observational equivalence difficulty sargent 1976 are not entirely satisfying in these studies in effect gordon and mishkin are forced to make some untested restrictions in order to distinguish the anticipated from the unanticipated components

a simple selling and buying procedure abstract for the assignment game we analyze the following mechanism sellers simultaneously fix their prices first then buyers sequentially decide which object to buy also each buyer may report his or her indifferences along with the previous buyers indifferences to the following buyer the first phase determines the potential prices while the second phase determines the actual matching reporting truthfully the indifferences is always a dominant strategy for the buyers moreover when buyers state their true indifferences the subgame perfect equilibria outcomes of the mechanism correspond to the maximum equilibrium price vector together with optimal matchings journal of economic literature classification numbers c78 d78

time frequency causality and connectedness between international prices of energy food industry agriculture and metals abstract this study analyzes the lead lag relationship between the price indices of energy fuels and each of food industrial inputs agriculture raw materials metals and beverages in the time frequency domain to this end we first use the wavelet coherency and phase differences next we use the diebold and yilmaz 2012 and barunik and krehlik 2017 spillover indices to analyse the connectedness among the set of the price indices under consideration the period of the study is 1990m1 to 2017m5 the wavelet coherency results reveal that there are important and significant relations between the fuel and food prices the fuel and industrial prices and the fuel and metal prices these results also show that there are phase relationships between those paired prices the volatility spillover results indicate that the agricultural sector is the most affected by shocks from the other markets the return series of the industrial input prices at all frequencies appears to be the main source of volatility transmission to the prices of the other commodities over the whole period this finding underlines the relevance of the industrial inputs to policy makers particularly when they design policies to provide incentives related to industrial production

let them cheat abstract we consider the problem of fairly allocating a bundle of infinitely divisible goods among a group of agents with classical preferences we propose to measure an agent s sacrifice at an allocation by the size of the set of feasible bundles that the agent prefers to her consumption as a solution we select the allocations at which sacrifices are equal across agents and this common sacrifice is minimal we then turn to the manipulability of this solution in the tradition of hurwicz 1972 we identify under some mild assumptions on preferences the equilibrium allocations of the manipulation game associated with this solution when all commodities are normal for each preference profile each equal division constrained walrasian allocation is an equilibrium allocation conversely each equilibrium allocation is equal division constrained walrasian furthermore we show that if normality of goods is dropped then equilibrium allocations may not be equal division constrained walrasian

a reconsideration of sims evidence concerning monetarism abstract in var systems such as those of sims 1980 monetary policy surprises may be more accurately represented by interest rate than money stock innovations especially if the monetary authority uses an interest rate instrument

implementation in the many to many matching market abstract this paper deals with a discrete many to many matching market of firms and workers we analyze the following mechanism firms announce the set of workers they want to hire then workers select the set of firms with which they want to work the first phase of the game determines the potential partners while the second phase determines the actual matching we prove that subgame perfect nash equilibria spne always exist while strong equilibria se may not exist we characterize the spne outcomes as the pairwise stable matchings and show that there may be no spne outcome in the core when the preferences of the agents are not maximin however when the preferences of the firms respectively workers are maximin the core always contains the equilibrium outcomes

on interest rate innovations and anticipated monetary policy abstract in this note i investigate whether anticipated money matters by following mccallum s 1983 suggestion that nominal interest rates be included in a var system estimated on data spanned by a policy of interest rate targeting the evidence is in favour of gordon s 1982 natural rate hypothesis gradual price adjustent model of policy ineffectiveness ambler and phaneuf 1988 have shown the results can be interpreted as evidence in favour of contract based models of the business cycle

this is what happened to the oil price macroeconomy relationship abstract many of the quarterly oil price increases observed since 1985 are corrections to even bigger oil price decreases the previous quarter when one looks at the net increase in oil prices over the year recent data are consistent with the historical correlation between oil shocks and recessions

in search of advice for participants in matching markets which use the deferred acceptance algorithm many centralized entry level labor markets use the firm proposing deferred acceptance da algorithm to compute the matching that is implemented among workers and firms we propose a definition of the strategic options a worker faces in the da algorithm then we develop a theory to advise workers who distinguish between the firms from which they believe not to receive a proposal the firms from which they might receive a proposal and the firms from which they certainly receive a proposal if a worker is not able to deduce which new proposals she receives after having rejected others then it is not profitable for her to submit a list that reverses the true ranking of any two acceptable firms furthermore it is not beneficial for her to include a firm in her submitted list that is unacceptable to her

how do oil producers respond to oil demand shocks abstract this paper analyzes the response of international oil producers to demand induced changes in the price of crude oil during 1975 2011 focusing on potential differences between opec and non opec countries the goal is to derive consistent estimates of the short run price elasticity of crude oil supply at the country level i find that oil producers hardly respond to demand shocks within the same month and that the corresponding impact price elasticities of supply are statistically indistinguishable from zero while there is little evidence of differences in the dynamic responses to a typical flow demand shock on average over the sample period opec members seem to curtail production in response to a speculative demand shock whereas non opec production expands significantly flow and speculative demand shocks account for a nontrivial fraction of the total variability in country level crude oil supply

dynamic spillovers between oil and stock markets in the gulf cooperation council countries this article exploits a new spillover directional measure proposed by diebold and yilmaz 2009 2012 to investigate the dynamic spillover of return and volatility between oil and equities in the gulf cooperation council countries during the period 2004 to 2012 our results indicate that return and volatility transmissions are bi directional albeit asymmetric in particular the oil market gives other markets more than it receives in terms of both returns and volatilities these trends were more pronounced in the aftermath of the global financial crisis in 2008 as the net contribution of oil has intensified after a burst during the crisis the empirical evidence from the sample is consistent with a system in which oil is playing the dominant role in the information transmission mechanism between oil and equities in the gcc countries

games of manipulation in marriage problems abstract we analyze the equilibrium outcomes of thepreference revelation gamesinduced bypareto efficientandindividually rationalsolutions in the context ofmarriage problems we employ a nash equilibrium refinement which allows deviations by a set of permissible coalitions and show that the set of equilibrium outcomes coincides with a variant of the core that allows blocking by only permissible coalitions journal of economic literatureclassification numbers c71 c78 d71 d78

measuring financial asset return and volatility spillovers with application to global equity markets we provide a simple and intuitive measure of interdependence of asset returns and or volatilities in particular we formulate and examine precise and separate measures of return spillovers and volatility spillovers our framework facilitates study of both non crisis and crisis episodes including trends and bursts in spillovers and both turn out to be empirically important in particular in an analysis of sixteen global equity markets from the early 1990s to the present we find striking evidence of divergent behavior in the dynamics of return spillovers vs volatility spillovers return spillovers display a gently increasing trend but no bursts whereas volatility spillovers display no trend but clear bursts

time and frequency dynamics of connectedness between renewable energy stocks and crude oil prices abstract this paper examines the time and frequency dynamics of connectedness among stock prices of u s clean energy companies crude oil prices and a number of key financial variables using the methodology developed by barunik and krehlik 2018 this approach allows measuring the dynamics of return and volatility connectedness over time and across frequencies simultaneously the empirical results show that most of return and volatility connectedness is generated in the very short term i e movements up to five days while the long term plays a minor role our analysis further reveals a greater degree of interconnectedness across crude oil and financial markets since the onset of the u s subprime mortgage crisis in summer of 2007 consistent with the view of a global re pricing of risk triggered by the recent worldwide financial crisis crude oil prices do not appear as a key driver of the stock market performance of renewable energy companies in the short term or the long term which suggests a decoupling of the alternative energy industry from the traditional energy market moreover crude oil prices are a net receiver of financial shocks supporting the financialization of the commodity markets since the early 2000s in addition a significant pairwise connectedness is found mainly in the short term between clean energy and technology stock prices indicating that these two types of stocks are perceived by investors as similar assets these results can have important practical implications for investors and policy makers with different time horizons

time and frequency connectedness among oil shocks electricity and clean energy markets abstract this paper examines the time and frequency connectedness among electricity carbon and clean energy markets and oil price demand and supply shocks in doing so we use the spillover method proposed by diebold and yilmaz 2012 and its extension in the frequency domain by barunik and k ehlik 2018 we find increased connectedness during the global financial crisis as well as in the shale oil revolution period the total connectedness is also higher in the short run compared to the long run due to their low connectedness electricity futures can act as a risk diversifier and safe haven asset against oil shocks net pairwise directional connectedness among oil shocks and the clean energy index is higher during the shale oil revolution these results have important implications for investors with different investment time horizons

interest rate innovations and the business cycle abstract recent evidence from vector autoregressions points towards the importance of interest rate innovations in explaining output variations we show that this evidence supports an interpretation of business cycles based on nominal contractual rigidities rather than cotinuous market clearing

implementation of stable solutions to marriage problems abstract this note analyzes the possibility of implementing stable outcomes for marriage markets our first result shows a contradiction between the use of stable mechanisms and the hypothesis of agents behavior considered in the nash equilibrium concept we analyze the possibility of implementing two sets of stable allocations by employing two types of mechanisms the first mechanism is a now or never choice process that permits us to implement in undominated nash equilibria the set of all the stable allocations the second choice process is the classic algorithm in matching theory the gale shapley mechanism a reversal property is observed in such a mechanism when agents act strategically the use of a mechanism which selects the best solution for one side of the market in the absence of strategic behavior yields the best stable solution for the agents on the other side under dominance solvability journal of economic literatureclassification numbers c72 d78 j41

reversal of asymmetries of allocation mechanisms under manipulation abstract consider a two person economy in which resources are allocated so as to maximize agent 1 s utility subject to the condition that agent 2 remains at least as well off as he was initially we show that agent 1 who is explicitly favored by the mechanism gains nothing by manipulation while agent 2 can reverse the asymmetry of the mechanism in his favor we give two other examples of mechanisms for which an analogous reversal of asymmetries takes place

the strategy structure of two sided matching markets we study two sided markets in which agents are buyers and sellers or firms and workers or men and women the agents are to form partnerships which provide them with satisfaction and at the same time make monetary transfers e g salaries or dowries the core of this market game is shown to have a particularly nice structure so that precise answers can be given to questions concerning comparative statics and manipulability the idea of using walrasian equilibrium as a mechanism for making allocations with desirable properties of fairness and efficiency has been studied extensively the scheme involves having agents specify their supply and demand functions the competitive equilibria are then calculated and allocations are made accordingly in general this procedure may run into two difficulties first nonuniqueness if there are several equilibria there may be no fair way to decide which one should be implemented and second manipulability if there is only one equilibrium an informed agent may be able to influence it by suitably falsifying his demand data however as we will show here using the walrasian mechanism does work remarkably well for a certain class of important markets these are the matching markets of our title and they include markets for single items like houses where it is assumed that traders do not wish to acquire more than one item they also include labor markets in which it is desired to match workers with jobs at suitable salaries academic markets in which students are to be assigned to educational institutions marriage markets where men and women are matched through negotiating of dowries it turns out that in these markets both the problems of nonuniqueness and manipulability can be resolved in a

sincere and sophisticated players in an equal income market abstract we study the simultaneous direct revelation mechanism associated with each equal income competitive social choice function in the allocation of objects and money among sincere and strategic agents strategic agents take advantage of sincere agents they non cooperatively coordinate on the equal income competitive allocations for the true preferences that are pareto undominated for them within the set of equal income competitive allocations sincere agents are protected to some extent however their welfare is usually above their maximin payoff

the differential effects of oil demand and supply shocks on the global economy abstract we employ a set of sign restrictions on the impulse responses of a global var model estimated for 38 countries regions over the period 1979q2 2011q2 as well as bounds on impact price elasticities of oil supply and oil demand to discriminate between supply driven and demand driven oil price shocks and to study the time profile of their macroeconomic effects across a wide range of countries and real financial variables we show that the above identification scheme can greatly benefit from the cross sectional dimension of the gvar by providing a large number of additional cross country sign restrictions and hence reducing the set of admissible models the results indicate that the economic consequences of a supply driven oil price shock are very different from those of an oil demand shock driven by global economic activity and vary for oil importing countries compared to energy exporters while oil importers typically face a long lived fall in economic activity in response to a supply driven surge in oil prices the impact is positive for energy exporting countries that possess large proven oil gas reserves however in response to an oil demand disturbance almost all countries in our sample experience long run inflationary pressures an increase in real output a rise in interest rates and a fall in equity prices

volatility spillovers between crude oil and chinese sectoral equity markets evidence from a frequency dynamics perspective abstract we examine the frequency dynamics of volatility spillovers between crude oil and china s stock markets in a spectral representation framework of generalized forecast error variance decomposition using sectoral stock indices data we find evidence of total volatility spillover driven mainly by short term spillovers the net spillovers of the oil market are almost all positive and dominated by short ter m components although the spillover during china s 2015 financial crisis is negative and attributable to long term components in addition there exists heterogeneity in net pairwise frequency spillovers between the oil and sectoral stock markets moreover structural breaks in volatilities appear to be a significant feature of volatility spillovers finally frequency spillovers in our system can predict future stock market volatility these results have economic implications for investors and policymakers

price inertia and policy ineffectiveness in the united states 1890 1980 this paper introduces a new approach to the empirical testing of the lucas sargent wallace lsw policy ineffectiveness proposition which compares the lsw hypothesis with an alternative that states that prices respond fully in the long run but only gradually in the short run to nominal aggregate demand disturbances the empirical equations estimated for a new set of quarterly data extending back to 1890 exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal gnp the paper compares and tests three alternative methods of introducing persistence effects into the lsw framework

the dynamics of spillover effects during the european sovereign debt turmoil abstract in this paper we modify and extend the framework of diebold and yilmaz 2011 to quantify spillovers between sovereign credit markets and banks in the euro area spillovers are estimated recursively from a vector autoregressive model of daily changes in credit default swap cds spreads with exogenous common factors we account for interdependencies between sovereign and bank cds spreads and derive generalized impulse response functions specifically we assess the systemic effect of an unexpected shock to the creditworthiness of a sovereign or country specific bank index on other sovereigns and bank cdss between october 2009 and july 2012 channels of shock transmission from or to sovereigns and banks are summarized in a contagion index and its four components i among sovereigns ii among banks iii from sovereigns to banks and iv from banks to sovereigns we also highlight the impact of policy related events on the contagion index