Unconventional monetary policy and policy foresight

Abstract

What are the effects of unconventional monetary policy interventions on the economy? Empirical studies utilizing traditional SVAR models consistently report expansionary effects on output and prices while considering only a small number of variables. This paper is the first to present both narrative and empirical evidence indicating that these models are susceptible to policy foresight, as central banks frequently announce their unconventional policies months in advance. To address policy foresight, we estimate a Bayesian FAVAR model with an extended set of information for the Euro Area. Consistent with the existing literature, we find that an unconventional monetary policy shock boosts economic activity by increasing industrial production and reducing the unemployment rate. Notably, our estimated effects are both larger and more persistent compared to previous findings. Furthermore, the shock decreases interest rates, interest rate spreads, and government bond yields, leading to an improvement in financial conditions. In a noteworthy departure from previous research, we find significant uncertainty regarding the impacts on consumer and producer prices, highlighting the need for further research.