Draghi Effect

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DEFINITION

The calming effect of European Central Bank President, Mario Draghi, on global financial markets. When the Draghi effect is at play, yields on bonds of embattled European nations, such as Greece and Spain, recede from historic high levels, reducing their cost of borrowing and indicating that there is buyer demand for their sovereign bonds. The euro also tends to rise under the Draghi effect, while risk appetite returns and equity markets rally. In short, the Draghi effect causes the European sovereign debt crisis to look less gloomy and the global macroeconomic more positive.

INVESTOPEDIA EXPLAINS

The Draghi effect is made possible by the enormous credibility that Mario Draghi possesses in global financial markets. Mario Draghi assumed the office of President of the ECB in November 2011, after 15 years in academia as a Professor of Economics and two decades in the public and private sector, with institutions such as the World Bank, the Italian Treasury, Goldman Sachs and the Bank for International Settlements. This combination of academic and professional experience gives Draghi a level of credibility in financial markets that is perhaps only matched by that accorded to Federal Reserve chairman, Ben Bernanke.


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