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In the last half-decade the European Monetary Union (EMU) has experienced a growing financial instability culminating with an extended sovereign debt crisis that has hit mostly the peripheral countries. Besides weak macroeconomic fundamentals, contagion phenomena in the government bond market damaged the countries more exposed to the financial stress. In this paper, the author investigates the issue of contagion applying to the financial field an innovative econometric technique, i.e., panel spatial regression. The paper documents: (i) the presence of contagion, in particular among peripheral countries; (ii) the changes in the magnitude of contagion in the different phases of the debt crisis; and (iii) the relevance of policy interventions in reducing the contagion effect in the EMU.

for comments on this paper, and especially Matt Notowidigdo for his thoughtful suggestions and Henry Hyatt for advise on the use of the algorithm to measure AKM and use of LEHD data. Adriana Kugler is the corresponding author. The views expressed herein are those of the authors and do not necessarily reflect those of their employers nor of the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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