The proposed research will investigate how the presence of convergence clubs in the Euro Area countries’ sovereign bond yield spreads affects credit supply. From the early 2000s, academic literature showed how the European Monetary Union (EMU) resulted in convergence of sovereign bond yield spreads across the member countries. However, after the Great Recession in 2007- 2009 and, more importantly, the Euro Area sovereign debt crisis in 2011-2013, the presence of convergence in the sovereign bond yield spreads was intensely questioned. The full convergence hypothesis must be rejected based on this time period. An alternative hypothesis of convergence clubs exists, i.e., the presence of different groups of Euro Area countries demonstrating convergence in sovereign bond yield spreads to different steady-states.
The proposed research questions are:
Does the presence of convergence clubs affect the credit supply through different bank lending standards?
Do the banks headquartered in the countries converging to the same club reveal similar bank lending activity?