Unconventional Monetary Policy: Diversity of Measures and Information Effects

Abstract

The paper presents an analysis of the consequences of the European Central Bank’s (ECB) unconventional monetary policy measures from 2007 to 2019. Econometric estimates of the effectiveness of the ECB’s policy can be biased for two reasons: first, the entire range of adopted measures may not be considered, and second, unexpected policy actions can prompt economic agents to revise their expectations and perceptions of the ECB’s monetary policy rule. Such an information shock might be mistakenly interpreted as a monetary shock. The approach proposed in the paper combines factor analysis and sign restrictions on high-frequency data in a Bayesian Vector Autoregression (BVAR) model. This approach yields findings that align with macroeconomic theory and offers a more comprehensive insight into the effects of different unconventional monetary policy measures on both financial and real variables. The identification of a monetary shock is carried out in parallel with the identification of an information shock. Unconventional monetary policy measures are approximated using high-frequency factors that influence specific segments of the yield curve. Unconventional ECB measures prove effective in stimulating business activity and price growth as well as in contributing to reduced financial stress. However, there is heterogeneity in their effects. The announcement of quantitative easing exhibits a small external lag with respect to the policy and leads to increased stock prices and lending volumes, indicating the effectiveness of the portfolio rebalancing and credit channels. For measures related to the shorter end of the yield curve, the external lag of the policy can extend up to a year. These measures strongly impact price growth due potentially to effective management of economic agents’ expectations. The consequences of information shocks are moderate and manifest prominently only in the initial months. This limits their ability to offset the effects of monetary policy and does not hinder the ECB’s goal of achieving inflation targets