European Central Bank Monetary Policy Research Articles

FinSentGPT: A universal financial sentiment engine?

We present FinSentGPT, a financial sentiment prediction model based on a fine-tuned version of the artificial intelligence language model, ChatGPT. To assess the model’s effectiveness, we analyse a sample of US media news and a multi-language dataset of European Central Bank Monetary Policy Decisions. Our findings demonstrate that FinSentGPT’s sentiment classification ability aligns well with a prominent English-language finance sentiment model, surpasses an established alternative machine learning model, and is capable of predicting sentiment across various languages. Consequently, we offer preliminary evidence that advanced large-language AI models can facilitate flexible and contextual financial sentiment determination, transcending language barriers.

Monetary policy spillovers through debt currencies

Using high-frequency measures of monetary policy shocks, I show that stock returns for non-US firms with a higher foreign debt ratio systematically respond more to US monetary policy via the exchange rate channel, especially for those firms with dollar-denominated bonds. I do not find similar transmission effects from European Central Bank monetary policy shocks to firms with euro-denominated debt.

EUROPEAN FINANCIAL MARKETS CONNECTEDNESS AND MONETARY POLICY COMMUNICATION STRATEGY:SPILLOVER EFFECTS FOR CENTRAL AND EASTERN EUROPE

This study evaluates the impact of unconventional policy announcements by the European Central Bank (ECB) on the interconnectedness of sovereign credit default swaps (SCDS) markets in the European Union (EU) from 2009 to 2014. The findings suggest that ECB's unconventional policy measures reduced sovereign default risk not only in Eurozone nations but also in Central and Eastern European countries. To investigate the transmission of monetary policy effects across European countries, we employ the Diebold & Yilmaz connectedness framework along with an event-study approach. Our analysis reveals robust evidence of substantial positive spillovers from ECB monetary policy measures to all EU countries, effectively shielding the SCDS market from adverse shocks. Among various policy tools, we observe that asset purchase programs enhance overall connectedness, while mixed policy measures bolster within-cluster connectedness. Furthermore, our results highlight the efficacy of specific monetary policy instruments, indicating that asset purchase programs and quantitative easing are particularly effective in reducing sovereign risk. Keywords: communication strategy, financial markets, monetary policy, sovereign risk, Central and Eastern Europe

Responses of Swiss interest rates and stock prices to ECB policy surprises

We employ local projections to analyse the responses of Swiss asset prices to scheduled policy decisions of the European Central Bank (ECB) as a case study of ECB policy spillovers to European countries outside the euro area. Focusing on ECB policy shocks that are related to different policy instruments of the ECB, our empirical results leave the impression that surprises related to the ECB target policy rate and to the ECB’s longer-term forward guidance or its asset purchases tend to move Swiss interest rates and stock prices in the same direction. Shocks explicitly designed to capture pure ECB monetary policy and information effect shocks are weakly associated with movements in Swiss asset prices on average.

Accountability of greening the ECB

Greening the European Central Bank (ECB) has been a highly debated subject in the Eurozone/EU, featuring in the ECB monetary policy strategy review and the ECB Climate Change Action Plan. This is part of a worldwide trend towards ‘sustainable central banking’. This article focuses on the accountability of the ECB as a European institution, which enjoys a very special position in the EU legal framework, with a defined mandate conferred onto it by the Treaties (TEU and TFEU). The question at heart is, first, whether the existing normative framework allows an interpretation and understanding of the ECB's mandate to incorporate sustainability goals, and second, how sustainability objectives can be operationalized in the actual conduct of monetary policy. Whether and to what extent the ECB objectives and tasks can be ‘greened’ depends also on the possibility of integrating such an augmented mandate with adequate accountability requirements. Building on the concept of accountability and the framework of ‘accountable independence’ of the ECB, the article considers the relationship between accountability and greening the ECB, with an emphasis on the monetary policy responsibilities.

Trustee strategies, politicization and de‐delegation: The case of the European Central Bank

AbstractThis article shows how the European Central Bank (ECB) reduced the risk of politicization and de facto de‐delegation despite experiencing contestation. During the euro area crisis and the coronavirus emergency the ECB's monetary policy measures have been widely praised for their effectiveness. Even though the ECB is an independent trustee that cannot be easily sanctioned, it needs to engage with its principals to receive their political backing for common projects and in order to reaffirm its own centrality in governance. This article identifies different trustee strategies to reduce politicization and thereby to decrease the risk of de facto de‐delegation: (i) dualism, (ii) voluntary self‐restraint, and (iii) changing the yard stick. It concludes by showing that the ECB has expanded its monetary policy toolbox without triggering neither formal nor de facto de‐delegation.

Are monetary policy shocks causal to bank health? Evidence from the euro area

Despite considerable efforts of the European Central Bank (ECB) to support bank intermediation after the 2008 financial crisis, the recovery of euro area banks remained incomplete. Although many studies indicate that central banks can influence the stock prices of firms through their policy actions and communication, a knowledge gap exists as to whether the ECB's monetary policy can influence bank health. Through a high-frequency identification approach, this study reveals that the causal effect of conventional monetary policy action and communication by the ECB on bank stock prices differed over time, whereas its influence on bank financing costs was robust. This study provides new evidence showing that information effects related to policy easing surprises in the aftermath of the 2008 financial crisis hampered the ECB efforts to improve bank health and that its Odyssean communication signals (related to forward-looking announcements of policy easing) supported bank health during this phase. Local projections suggest that the response of banks to monetary policy shocks displayed some persistence, where ECB policy surprises and communications that shifted up (down) the yield curve were normally positive (negative) for bank health. The findings solicit a new perspective when assessing the influence of the ECB's monetary policy measures on euro area banks.

The ECB's asset purchase programme: Theory, effects, and risks

AbstractIn response to the Covid‐19 crisis, the European Central Bank (ECB) has relaunched a massive asset purchase programme within its combined‐arms monetary strategy. This paper surveys and discusses the theory and the evidence of the central bank's unconventional monetary tools for the euro area. It analyses the role of the asset purchase programmes in the ECB's toolkit and the associated risks, focusing specifically on the gradual unwinding of these unconventional initiatives. Finally, the paper offers some insight into the possible evolution of the ECB's monetary policy.

Media sentiment on monetary policy: Determinants and relevance for inflation expectations

We construct a new indicator to capture media sentiment about the European Central Bank monetary policy and its relevant environment by analyzing 25,000 articles from five major international newspapers. Using named entity recognition and part-of-speech tagging, we propose a methodology to dissociate the dissemination of official communications of the central bank from the media comments. The resulting (daily) index correlates with some (monthly) standard measures of economic sentiment but reveals idiosyncratic information on monetary policy. Analyzing the determinants of our index, we find that both press conference and inter-meeting communications of the President significantly affect media sentiment. We then show that, controlling for a large range of factors, daily changes in media sentiment have predictive power for financial market inflation expectations.

The response of Brent crude oil to the European central bank monetary policy

This paper examines the impact of European Central Bank (ECB) monetary policy decisions on oil prices and liquidity using an event study with intraday data. We analyse the period from January 1999 to December 2020, which includes the financial crisis that started in August 2007. Our results show a significant response for oil returns only during the financial crisis. Specifically, we find that Brent crude oil futures’ returns responded negatively to unexpected variations in the Italian risk premium as a measure of unconventional monetary policy actions – and positively to unexpected variations in short-term interest rates. That is, an unexpected increase in short-term interest rates and reductions in the Italian risk premium are taken as positive signals anticipating the end of the financial crisis. Moreover, as Brent is priced in US dollars, we have tested if the Brent response is due to the exchange rate response. We find that the null hypothesis of equal response from Brent and the exchange rate to ECB monetary policy announcements cannot be rejected. These are important results for monetary policy makers and financial agents.

Sustainable Economic Growth Support through Credit Transmission Channel and Financial Stability: In the Context of the COVID-19 Pandemic

All countries worldwide faced the COVID-19 pandemic and had to take actions to lower the economic shock. Financial authorities play an especially significant role in economics and can help to manage the negative consequences. This article focuses on the European central bank monetary policy and actions taken for COVID-19 risk management. This research aims to identify the significant factors influencing the long-term loans for enterprises’ credit conditions in a forward-looking approach and determine the impact of the spread of COVID-19 pandemic on banking sector credit risk, financial distress, lending growth, and financial soundness indicators. This research is focused on the credit transmission channel and the role of the Pandemic Emergency Purchase Program in different countries of the euro area. To reach the main goal, panel data regression models are used. Our findings showed that the banks’ risk tolerance is a principal factor influencing long-term loan credit standards. We also identified that the spread of the COVID-19 pandemic has a statistically significant negative effect on banking sector credit risk, financial distress, banking sector profitability, and solvency. Furthermore, after analyzing the euro area banking sector, we found that liquidity increased. Hence, it means that banks have enough funds to support sustainable economic growth, but on the other side, commercial banks do not want to take credit risk because of their risk tolerance. Our research findings show the mixed effect of the COVID-19 pandemic on financial stability: while the overall financial distress decreased and banking sector liquidity increased, the profitability and solvency decreased some extent.

The ECB's Tracker: Nowcasting the Press Conferences of the ECB

This paper proposes an econometric framework for nowcasting the monetary policy stance and decisions of the European Central Bank (ECB) exploiting the ow of conventional and textual data that become available between two consecutive press conferences. Decompositions of the updated nowcasts into variables' marginal contribution are also provided to shed light on the main drivers of the ECB's reaction function at every point in time. In out-of-sample nowcasting experiments, the model provides an accurate tracking of the ECB monetary policy stance and decisions. The inclusion of textual variables contributes significantly to the gradual improvement of the model performance. JEL Classification: E37, E47, E52

Fed and ECB: which is informative in determining the DCC between bitcoin and energy commodities?

PurposeThis paper provides an important perspective to the predictive capacity of Fed and European Central Bank (ECB) meeting dates and production announcements for the dynamic conditional correlation (DCC) between Bitcoin and energy commodities returns and volatilities during the period from August 11, 2015 to March 31, 2018.Design/methodology/approachTo assess empirically the unanticipated component of the US and ECB monetary policy, the authors pursue the Kuttner's approach and use the federal funds futures and the ECB funds futures to assess the surprise component. The authors use the approach of DCC as introduced by Engle (2002) during the period from August 11, 2015 to March 31, 2018.FindingsThe authors’ results suggest strong significant DCCs between Bitcoin and energy commodity markets if monetary policy surprises are incorporated in variance. These results confirmed the financialization of Bitcoin and commodity energy markets. Finally, the DCC between Bitcoin and energy commodity markets appears to respond considerably more in the case of Fed surprises than ECB surprises.Originality/valueThis study is a crucial topic for policymakers and portfolio risk managers.

Monetary Policy and its Transmission in a Globalised World

This paper estimates and compares the international transmission of European Central Bank (ECB) and Federal Reserve System monetary policy in a unified and methodologically consistent framework. It identifies pure monetary policy shocks by purging them of the bias stemming from contemporaneous central bank information effects. The results suggest that there is a hierarchy in the global spillovers from ECB and Federal Reserve monetary policy: while the spillovers to consumer prices are relatively small in both directions, Federal Reserve monetary policy shocks have a larger impact on euro area financial markets and real activity. Federal Reserve monetary policy also has a significantly larger impact than ECB monetary policy on real and financial variables in the rest of the world. JEL Classification: E44, E52, F3, E58, F42

Media Sentiment on Monetary Policy: Determinants and Relevance for Inflation Expectations

We construct a new indicator to capture media sentiment about the European Central Bank monetary policy and its relevant environment by analyzing 25,000 articles from five major international newspapers. Using named entity recognition and part-of-speech tagging, we propose a methodology to dissociate the dissemination of the central bank's official communications from the media comments. The resulting -daily- index correlates with some -monthly- standard measures of economic sentiment but reveals idiosyncratic information on monetary policy. Analyzing the determinants of our index, we find that both press conference and inter-meeting communications of the president significantly affect media sentiment. We then show that, controlling for a large range of factors, daily changes in media sentiment have predictive power on financial markets’ inflation expectations.

Koordynacja polityki fiskalnej i monetarnej w strefie euro przed kryzysem i po kryzysie

Znaczenie koordynacji polityki fiskalnej i monetarnej istotnie wzrosło po kryzysie z końca pierwszej dekady XXI w. Osiągnięcie skoordynowanych działań, zarówno w aspekcie koordynacji narodowych polityk fiskalnych, jak i w zakresie fiskalno-monetarnym, miał wspomóc szereg wprowadzonych reform od 2011 r. Celem niniejszego artykułu jest analiza koordynacji polityk fiskalnych państw członkowskich strefy euro oraz ich zagregowanego nastawienia z polityką pieniężną Europejskiego Banku Centralnego w dwóch okresach badawczych rozdzielonych najważniejszymi reformami. Analiza obejmuje lata 1999–2018. Ten przedział czasowy został podzielony na dwa podokresy: 1999–2010 i 2011–2018. Do analizy koordynacji nastawienia fiskalnego krajów strefy euro posłużono się indeksem restrykcyjności fiskalnej (FCI) i współczynnikiem korelacji. Zagregowane nastawienie polityk fiskalnych oraz polityki monetarnej, oszacowane za pomocą indeksu warunków pieniężnych (MCI), przedstawiono na mapie restrykcyjności (policy mix). Ponadto oszacowano związek indeksu policy mix (PMI) z luką produktową. Koordynacja narodowych polityk fiskalnych okazała się silniejsza w drugim analizowanym okresie. Niemniej jednak analiza koordynacji fiskalno-monetarnej nie pozwala na wyciągnięcie jednoznacznych wniosków. Policy mix w pierwszym analizowanym okresie miała charakter antycykliczny, natomiast w drugim – procykliczny. Wciąż istnieje pilna potrzeba dalszej poprawy zarządzania gospodarczego w strefie euro.

FINANCIAL INTERMEDIARIES’ ASSET–LIABILITY DEPENDENCY AND LOW-INTEREST-RATE ENVIRONMENT: EVIDENCE FROM EU LIFE INSURERS

This research studies the relationships between the two sides of life insurers’ balance sheet and investigates whether and how they changed during recent past years, when European Central Bank monetary policy drove market rates to unprecedented low levels. By using a canonical correlation analysis, we study the internal structure of the links within and between the asset and liability sides of 24 major European Union (EU) life insurers’ balance sheets over the 2007–2015 time horizon. We find strong and substantial evidence that life insurers’ assets and liabilities have become more independent over time. We argue that the declining trend of market interest rates has contributed to the generalized reduction in the linkage between the asset side and the liability side of EU life insurers, and has made insurance companies more exposed to ALM-related risks relative to the period before the financial crisis.

Twenty Years of European Central Bank Monetary Policy: A Keynesian and Austrian Perspective

AbstractThis article reviews how the European Central Bank (ECB) implemented its monetary policy for the euro area from 1999 to 2018 from two perspectives. Taking a Keynesian point of view, the euro area economy was beset for a long time by secular stagnation and required the ECB to ensure a protracted period of relatively low interest rates to provide continuous support to aggregate demand at the level of the Economic and Monetary Union (EMU). By contrast, the Austrian School of Economics argues that the low-interest rate bias of the ECB caused financial excesses and prevented a more rapid reallocation of unviable resources necessary for a sustainable expansion of aggregate supply. Both the Keynesian and the Austrian paradigm appear relevant when examining the monetary and financial aspects of the euro area business cycle and the secular decline of interest rates over the past 20 years. For most of the time, ECB monetary policy was the ‘only game in town’ and the EMU architecture was unable to deliver the balanced macroeconomic and financial policy mix required for a sustainable path of the euro area economy.

Transmission of the European Central Bank Monetary Policy Across Regional Stocks Markets

In this paper we estimate the transmission of common euro area monetary policy shocks across the euro area main stock markets. To do so, we develop global SVAR models in which the ECB monetary policy is modeled as a function of euro area aggregate variables and the US variables that define the FED monetary policy shocks. Our results suggest, in line with economic theory, that the transmission of monetary policy across Eurozone stocks markets displays heterogeneity driven by differences in the listed firms’ characteristics but also by the distance between the actual ECB stance and the obtained by applying a Taylor rule implied in the ECB policy to country-specific macroeconomic data. These results highlight the need for a corrective fiscal policy on the undesirable effects of the common monetary policy and may allow policymakers to check the effects of their fiscal policies when any.

The European Central Bank's Monetary Policy during Its First 20 Years

On June 1, 2018, the European Central Bank (ECB) celebrated its 20th anniversary. This paper provides a comprehensive view of the ECB's monetary policy over these two decades. The first section gives a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases "conditioning" ECB monetary policy. We describe the monetary policy decisions from the ECB's perspective and against the background of its evolving monetary policy strategy and framework. We also highlight a number of the key, critical issues that were the subject of debate. The second section contains various assessments. We analyze the achievement of the price stability mandate and developments in the ECB's credibility, and we also investigate the ECB's interest rate decisions through the lens of a simple empirical interest rate reaction function. Finally, we present the ECB's framework for thinking about nonstandard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how the ECB utilized its monetary policy to respond to the challenges posed by the European twin financial and sovereign debt crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary, and developing the strategic underpinnings of its policy framework.