This paper investigates the role of unconventional monetary policy as a source of timevariation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach. First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016. Second, we estimate the impact of ECB policy interventions on the time-varying risk factor sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk. Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis. JEL: E43, E44, F30, G01, G12Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy Acknowledgements: We thankfully acknowledge financial support by FCT (Fundação para a Ciência e a Tecnologia, Portugal). FCT had no involvement in the study design, collection, analysis and interpretation of data, writing and submission of this research paper. M. Dolores Gadea acknowledges financial support from the Ministerio de Ciencia y Tecnologia, Spain, under grant ECO2011-30260-C03-02. We thank participants at the 6th UECE Conference on Economic and Financial Adjustments, 2017 (Lisbon) for very useful comments, and we are grateful to Mina Kazemi for valuable research assistance.

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This paper sets out a comprehensive framework to identify regional business cycles within Spain and analyses their stylised features and the degree of synchronisation both within them and between them and the Spanish economy. We show that the regional cycles are quite heterogeneous although they display some degree of synchronisation. We also propose a dynamic factor model to cluster the regional comovements. We find that the Spanish business cycle is not the same as those of the 17 regions, but is the sum of the different regional behaviours. Clusters with a high industrial weight, per capita income and human capital and a low unemployment rate are also more synchronized. The implications derived from our results are useful both for policy makers and analysts.

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We acknowledge the useful comments of an anonymous referee. We are also indebted to Pierre Perron and Zhongjun Qu, for their helpful suggestions. Financial support from Spanish Government CICYT projects ECO2008-03040 and ECO2009-13085 is recognised. The usual disclaimer applies.