ECB Announcements Research Articles

Same actions, different effects: The conditionality of monetary policy instruments

This paper explores the signaling effect of central bank announcements clarifying the reaction function of policy interventions. We exploit the unique setting provided by ECB asset purchase programs. We find that the same action – purchases of identical assets – undertaken under different titles generates different responses. PSPP affects inflation swaps whereas PEPP impacts sovereign spreads, so that only the variables associated with the communicated rationale of each program react. We highlight the importance of clarifying the conditional path of policy instruments for the transmission of monetary policy. We also provide evidence of this signaling channel from other ECB and BoE announcements.

Co-Jumping of Treasury Yield Curve Rates

Abstract We study the role of co-jumps in the interest rate futures markets. To disentangle continuous part of quadratic covariation from co-jumps, we localize the co-jumps precisely through wavelet coefficients and identify statistically significant ones. Using high frequency data about U.S. and European yield curves we quantify the effect of co-jumps on their correlation structure. Empirical findings reveal much stronger co-jumping behavior of the U.S. yield curves in comparison to the European one. Further, we connect co-jumping behavior to the monetary policy announcements, and study effect of 103 FOMC and 119 ECB announcements on the identified co-jumps during the period from January 2007 to December 2017.

Breaking Monetary Policy News: The Role of Mass Media Coverage of ECB Announcements for Public Inflation Expectations

Breaking Monetary Policy News: The Role of Mass Media Coverage of ECB Announcements for Public Inflation Expectations

Monetary Policy and Liquidity Constraints: Evidence from the Euro Area

We quantify the relationship between the response of output to monetary policy shocks and the share of liquidity-constrained households. We do so in the context of the euro area, using a Local Projections Instrumental Variables estimation. We construct an instrument for changes in interest rates from changes in overnight indexed swap rates in a narrow time window around ECB announcements. Monetary policy shocks have heterogeneous effects on output across countries. Using micro data, we show that the elasticity of output to monetary policy shocks is larger in countries that have a larger fraction of households that are liquidity constrained. (JEL E23, E43, E52, F33, F45, G51)

Information effects of euro area monetary policy

This paper provides evidence for central bank information effects in the euro area. ECB announcements seem to convey information not only about monetary policy, but also about economic fundamentals. I separate these “information surprises” from “pure policy surprises” via sign restrictions and find intuitive effects of both surprise on a wide set of financial market prices, survey expectations and macroeconomic aggregates. Both surprise series are updated and made publicly available.

Spillover effects of sovereign debt-based quantitative easing in the euro area

This paper proposes an identification strategy for news about sovereign debt-based asset purchases. It measures sovereign yield changes that are unrelated to movements in risk-free interest rates or risk premiums. Around ECB announcements, these reflect the anticipation of shifts in the effective supply of government debt, caused by central bank purchases. This paper documents that asset purchase news about government bonds have substantial spillovers to corporate bond and stock markets, within and beyond the euro area. Spillovers are unequal across euro-area countries, as stock prices rise most in low-risk countries with very large firms. In contrast, sovereign yields fall homogeneously.

Fuelling fire sales? Prudential regulation and crises: evidence from the Italian market

The ECB announcement to reduce capital requirements for market risk to smooth pro-cyclicality, published in April 2020, is a good starting point to discuss the impact of regulation on individual banks on the stability of the whole banking and financial system.A large number of theoretical articles and a few empirical papers back the existence of an amplification effect on market volatility caused by the use of risk management measures (e.g. value-at-risk, VaR, for market risk) for regulatory purposes. However, to the best of my knowledge, no paper has empirically investigated the direct relation between the level of tightness of VaR risk limits and market volatility.In this article, I show that market volatility is positively related to past values of the measure of the tightness of the market risk limit, with an overshooting process of adjustment toward equilibrium. The analysis is limited to Italy. The empirical results, based on a unique dataset of VaR values and on other publicly available market data, are in line with the theoretical findings and are novel empirical evidence. They open the way to additional research on how to manage the channels of transmission of the amplification and overshooting effects from the risk management measure to systemic variables, to avoid unintended consequences of the application of individual supervision measures on the whole system.

Systemic risk and the COVID challenge in the european banking sector

This paper studies the systemic risk contribution of a set of large publicly traded European banks. Over a sample covering the last twenty years and three different crises, we find that all banks in our sample significantly contribute to systemic risk. Moreover, larger banks and banks with a business model more exposed to trading and financial market volatility, contribute more. In the shorter sample characterized by the Covid-19 shock, sovereign default risks significantly affected the systemic risk contribution of all banks. However, the ECB announcement of the Pandemic Emergency Purchasing Programme restored calm in the European banking sector.

Systemic Risk and the COVID Challenge in the European Banking Sector

This paper studies the systemic risk contribution of a set of large publicly traded European banks. Over a sample covering the last twenty years and three different crises, we find that all banks in our sample significantly contribute to systemic risk. Moreover, larger banks and banks with a business model more exposed to trading and financial market volatility, contribute more. In the shorter sample characterized by the COVID-19 shock, sovereign default risks significantly affected the systemic risk contribution of all banks. However, the ECB announcement of the Pandemic Emergency Purchasing Programme restored calm in the European banking sector.

Modelling currency demand: the case of the euro

Liquidity management is a key mission of a central bank. In particular, the adequate provision of banknotes requires the understanding of what drives currency demand. The challenge is even bigger in the case of the European monetary union where the euro continues to develop into a well-established currency outside borders. In this respect, a novel indicator is proposed to reflect foreign demand developments. Moreover, besides the usual set of determinants, variables covering financial and economic policy uncertainty are also taken into account. The full denominational breakdown of banknotes is considered so as to unveil the heterogeneous role played by the several drivers. It is found that external demand is relevant for large denominations and uncertainty also matters for cash demand. Furthermore, the recent ECB announcement of the end of issuance of the largest denomination banknote led to a reduction in the overall demand for euro banknotes.

ECB’s communication and the yield curve: core versus periphery effects

ABSTRACT This paper shows peculiar reactions of sovereign yields to ECB announcements. The focus on different maturities reveals a diverse reaction within the euro area. While economies with a relatively low solvency rating are affected across the entire yield curve, economies with a relatively high solvency rating react significantly only at short maturities.

Does Monetary Policy Impact International Market Co-Movements?

We show that FED policy announcements lead to a significant increase in international comovements in the cross-section of equity and in particular sovereign CDS markets. The relaxation of unconventionary monetary policies is felt strongly by emerging markets, and by countries that are open to the trading of goods and flows, even in the presence of floating exchange rates. It also impacts closed economies whose currencies are pegged to the dollar. This evidence is consistent with recent theories of a global financial cycle and the pricing of a FED's put. In contrast, ECB announcements hardly affect comovements, even in the Eurozone.

Central Bank Information Shocks and Exchange Rates

The dynamic effects of ECB announcements, disentangled into pure monetary policy and central bank information shocks, on the euro (EUR) exchange rate are examined using a Bayesian Proxy Vector Autoregressive (VAR) model fed with high-frequency data. Contractionary monetary policy shocks result in a sizable appreciation of the nominal effective and bilateral EUR exchange rates, peaking on impact. By contrast, despite similar effects on interest rate differentials, responses to central bank information shocks exhibit strong heterogeneities across currency pairs. This disparity can be rationalized by an increase in investors' risk appetite, as measured by the VIX, triggering capital flows into speculative currencies when the ECB reveals a surprisingly sanguine economic outlook. In line with this, the EUR depreciates against a high-yielding carry trade investment portfolio, while it appreciates against a low-yielding carry trade funding portfolio.

Country-specific euro area government bond yield reactions to ECB’s non-standard monetary policy program announcements

Abstract This paper employs event study methods to evaluate the effects of ECB’s non-standard monetary policy program announcements on 10-year government bond yields of 11 euro area member states. Measurable effects of announcements arise with a one-day delay meaning that government bond markets take some time to react to ECB announcements. The country-specific extent of yield reduction seems inversely related to the solvency rating of the corresponding countries. The spread between core and periphery countries reduces because of a stronger decrease in the latter. This result is confirmed by letting the announcement variable interact with the current spread level.

Co-jumping of Treasury Yield Curve Rates

We study the role of co-jumps in the interest rate futures markets. To disentangle continuous part of quadratic covariation from co-jumps, we localize the co-jumps precisely through wavelet coefficients and identify statistically significant ones. Using high frequency data about U.S. and European yield curves we quantify the effect of co-jumps on their correlation structure. Empirical findings reveal much stronger co-jumping behavior of the U.S. yield curves in comparison to the European one. Further, we connect co-jumping behavior to the monetary policy announcements, and study effect of 103 FOMC and 119 ECB announcements on the identified co-jumps during the period from January 2007 to December 2017.

Euro Area Sovereign Risk Spillovers Before and after the Ecb's OMT Announcement

We study the dynamics of sovereign risk spillovers from (and between) Spain and Italy, before and after the ECB's announcement of the OMT program. We identify domestic Italian and Spanish sovereign risk shocks through an intraday event study. The shocks are used as external instruments in bilateral, daily, local projection regressions. Prior to the announcement of the OMT, changes in the Spanish and, to a lesser extent, Italian spread spilled over to many other euro area member states, and also affected the euro-dollar exchange rate. Peak effects generally materialized after 2-3 days. Since the OMT announcement, spillovers to non-crisis, non-safe haven countries have disappeared. Some spillovers among crisis countries persist, but are smaller and shorter-lived than before. Overall, our results are consistent with the view that the OMT, through eliminating equilibrium multiplicity, has largely stopped contagion.

Monetary Policy and Liquidity Constraints: Evidence from the Euro Area

We quantify the relationship between the response of output to monetary policy shocks and the share of liquidity constrained households. We do so in the context of the euro area using a Local Projections Instrumental Variables estimation. We construct an instrument for changes in interest rates from changes in overnight indexed swap rates in a narrow time window around ECB announcements. Monetary policy shocks have heterogeneous effects on output across countries. Using micro data, we show that the elasticity of output to monetary policy is larger in countries that have a larger fraction of households that are liquidity constrained.

Information Effects of Euro Area Monetary Policy: New Evidence from High-Frequency Futures Data

Central bank announcements move financial markets. The response of inflation and growth expectations, on the other hand, is often small or even counterintuitive. Based on tick-by-tick futures prices on bonds and stock prices, I confirm these seemingly puzzling results for the euro area and provide evidence that they are due to central bank effects. That is, ECB announcements convey not only about monetary policy, but also about economic fundamentals. I separate these information from pure policy via sign restrictions and find intuitive effects of both shocks on a wide set of financial market prices and survey measures of economic expectations.

Measuring Monetary Policy Spillovers between U.S. and German Bond Yields

In this paper we estimate the magnitude of spillovers between bond markets in the U.S. and Germany following monetary policy communications by the FOMC and the ECB. The identification of policy-related co-movements following FOMC announcements, in particular, can be difficult because many foreign bond markets, including those in Germany, are closed at the time of the announcement. To address this issue we use intraday futures market data to estimate spillovers during a narrow and overlapping event window. We find that about half of the reaction in German domestic yields spills over to U.S. yields following ECB announcements, which is nearly identical to the spillover from U.S. yields to German Bund yields following FOMC announcements. This result contrasts with the conventional wisdom that FOMC announcements spill over to other countries but that there is not much effect in the other direction. We also find that spillover estimates are slightly higher in the post-crisis period, but that there is little difference in the spillover impact of conventional versus unconventional monetary policy. Our results based on futures prices differ noticeably from those using daily prices, which suggests that spillover estimates based on cash market data can be misleading.

The Euro Crisis and the 24h Pre-ECB Announcement Return

We document economically and statistically large 24h pre-ECB announcement re- turns in European equity. For the overall market the respective annual premium (2010 – 2015) was over 6% (Sharpe ratio of 1.5). We show that the pre-ECB return is mainly driven by periods of high uncertainty during the European sovereign debt crisis which can be characterized as times of severe eurozone break-up fear. For these periods the premium for the Euro Stoxx 50 index is 2.5 times higher than in non-stressed periods; for the Euro Stoxx Banks index it reaches on average almost 3% (per announcement). Current theories and explanations that relate the positive premium to the uncertainty around an announcement or to a positively anticipated event are able to explain several of the stylized facts but cannot rationalize all characteristics of the ECB announcement returns.