The consequences of unconventional monetary policy in euro area in times of monetary easing
Keywords:unconventional monetary policy, credit multiplier, interest rate, quantitative easing
Research background: In this research paper, an attempt is made to evaluate the impacts of ECB?s unconventional monetary policy which has been applied after Global Financial Crisis. Because of the new economic and monetary conditions, the effectiveness of conventional monetary tools has been questioned.
Purpose of the article: Designed models examine the consequences of unconventional monetary policy for macroeconomic variables, monetary variables and interest rates in the euro area. Particular attention is paid to the response of the price level, represented by HICP, to various monetary policy innovations. Except a shock in credit multiplier and asset purchase programme (APP), also the effectiveness of a conventional monetary tool, such as main refinancing operation (MRO) interest rate, is inspected.
Methods: Use has been made of impulse responses from structural VAR models to analyze a large sample that covers the time horizon of 1999 to 2016. Several econometric tests are performed to provide a profound analysis. The conclusions from baseline models are verified in multiple robustness check models, which are specified under alternative conditions.
Findings & Value added: It has been found that, in the aftermath of the Global Financial Crisis, conventional monetary instruments are effective in the short-run. In the long-run, unconventional monetary policy has a greater potential to stabilize the economy than the traditional interest rate transmission channel. The conclusions from the baseline models are verified in multiple robustness check models, which are specified under alternative conditions.
Andrade, P., Breckenfelder, J. De Fiore, F., Karadi, P., & Tristan, O. (2016). The ECB´s asset purchase programme: an early assessment. ECB Working paper series, 1956/September 2016.
Bernanke, B. (2015). Why are interest rates so low, part 4: term premiums. Retrieved from https://www.brookings.edu/blog/ben-bernanke/2015/04/13/why-are-interest-rates-so-low-part-4-term-premiums/ (01.03.2017).
Brainard, L. (2016). The ‘new normal’ and what it means for monetary policy. Board of Governors of the Federal Reserve System. Retrieved from https://www.federalreserve.gov/newsevents/speech/brainard20160912a.htm (01.03.2017).
Conti, A. M., Neri, S., & Nobili, A. (2017). Low inflation and monetary policy in the euro area. ECB Working paper series, 2005/January 2017.
Demertzis, M., & Wolf, G. B. (2016). The effectiveness of The European Central Bank’s asset purchase programme. Bruegel, 2016/10.
Durlauf, S. N., & Blume, L. E. (2010). Monetary economics. Hampshire: Macmilan Publishers. doi: 10.1057/9780230280854.
Enders, W. (2010). Applied econometric time series. West Sussex: Wiley Desktop Edition.
Fratzscher, M., & Duca, M. L., & Straub, E. (2014). ECB unconventional monetary policy actions: market impact, international spillovers and transmission channels. 15th Jacques Polak Annual Research Conference, Washington DC, 2014. November 13-14.
Gujarati, D., & Porter, D. (2009). Basic econometrics. Singapore: McGraw Hill International Edition.
He, L. T. (2017). Emphasis and effectiveness of monetary policy of the Fed: a historical comparative analysis (1871–2013). International Journal of Monetary Economics and Finance, 10(1). doi: 10.1504/IJMEF.2017.081283.
Hosny, A. S. (2017). Does inflation targeting lower inflation? If yes, then when? International Journal of Monetary Economics and Finance, 10(3/4). doi: 10.1504/IJMEF.2017.087484.
Joyce, M., & Tong, M., & Wood, R. (2011). The United Kingdom’s quantitative easing policy: design, operation and impact. Bank of England - Quarterly Bulletin, 2011Q3.
Juselius, M., & Borio, C., & Disyatat, P., & Drehmann, M. (2017). Monetary policy, the financial cycle, and ultra-low interest rates. International Journal of Central Banking, 13(3).
Kajanová, J. (2011). The competitive advantage in the global labour market. Business, Management and Education, 9(2). doi: 10.3846/bme.2011.11.
Meinusch, A., & Tillmann, P. (2017). Quantitative easing and tapering uncertainty: evidence from Twitter. International Journal of Central Banking, 13(4).
Nelson, F. (2002). Direct effects of base money on aggregate demand: theory and evidence. Journal of Monetary Economics, 49(4), 687-708. doi: 10.1016/S0304-3932(02)00118-6.
Peersman, G. (2011). Macroeconomic effects of unconventional monetary policy in the euro area. ECB Working paper series, 1397/November 2011.
Praet, P. (2016). The ECB’s monetary policy response to disinflationary pressures. ECB and its Watcher XVII conference. Frankfurt am Main.
Ridhwan, M., de Groot, H., Nijkamp, P., & Rietveld, P. (2010). The impact of monetary policy on economic activity – evidence from meta-analysis. Tinbergen Institution Discussion Paper, TI 2010- 043/3. doi: 10.2139/ssrn.1594036.
Rosengren, E. S. (2016). Exploring the economy´s progress and Outlook. Federal Reserve Bank of Boston. Retrieved from https://www.bostonfed.org/-/media/Documents/Speeches/PDF/090916/090916text.pdf (03.03.2017).
Sims, C. J., & Stock, J., & Watson, M. (1990). Inference in linear time series models with some unit roots. Econometrica, 58(1). doi: 10.2307/2938337.
Tomann, H., & Stöppel, A. (2016). The ECB´s unconventional monetary policy. Europawissenschaften, Berlin.
Trichet, J. C. (2012). Unconventional monetary policy measures: principles - conditions - raison d’être. IJCB conference, Washington DC, 2012, March 23-24.
Yardeni, E., Quintana, M. (2017). Global Economic Briefing: Central Bank Balance Sheets. Yardeni Research, 2017.
Yellen, J. (2016). The Federal Reserve`s Monetary Policy Toolkit: Past, Present, and Future. Board of Governors of the Federal Reserve System. Jackson Hole conference, Wyoming, 2016. Retrieved from https://www.federalreserve.gov/ newsevents/speech/yellen20160826a.htm (01.03.2017).
Yu, E. (2016). Did Quantitative Easing Work? Federal reserve Bank of Philadelphia Research Department. Philadelphia, 2016. First Quarter 2016. Retrieved from https://www.philadelphiafed.org/-/media/research-and-data/publications /economic-insights/2016/q1/eiq116_did-quantitative_easing_work.pdf?la=en (01.03.2017).