Expanded Asset Purchase Programme Research Articles

The economic impact of yield curve compression: Evidence from euro area forward guidance and unconventional monetary policy

Unconventional monetary policies have now been part of the toolkit of developed economy central banks for well over a decade. The question of how their effects have changed over time is therefore an important one. This paper studies the impact of multiple forms of monetary policy surprise for the case of the ECB. I employ a semi-parametric time-varying VAR-X framework, which allows one to chart the changing responses of a broad range of financial and macroeconomic variables simultaneously. I develop high-frequency series that separate forward guidance from yield curve compression surprises — the use of the latter allows one to learn about the effects of flattening yield curves through the history of the ECB, including those induced by its Expanded Asset Purchase Programme (APP). Forward guidance surprises are found to have their maximum impact on inflation when these policies were linked to the duration of the APP. Yield curve compression surprises are shown to transition from largely financial effects on equity markets and risk, to having a greater effect on prices at the time of the APP. However, the maximal effect of the APP on prices is found to occur after its maximal effect at flattening the yield curve, indicating delayed transmission.

Unconventional Policies Effects on Stock Market Volatility: The MAP Approach

Abstract Taking the European Central Bank unconventional policies as a reference, we suggest a class of multiplicative error models (MEMs) tailored to analyse the impact such policies have on stock market volatility. The new set of models, called MEM with asymmetry and policy effects, keeps the base volatility dynamics separate from a component reproducing policy effects, with an increase in volatility on announcement days and a decrease unfolding implementation effects. When applied to four Eurozone markets, a model confidence set approach finds a significant improvement of the forecasting power of the proxy after the expanded asset purchase programme implementation. A multi-step ahead forecasting exercise estimates the duration of the effect; by shocking the policy variable, we are able to quantify the reduction in volatility which is more marked for debt-troubled countries.

The effects of the ECB’s expanded asset purchase programme

Abstract This paper provides empirical evidence on the financial and macroeconomic impact of the news associated to the announcement launching the ECB’s expanded asset purchase programme (APP). We proxy the APP announcement shock with an announcement variable derived from the institutional features of the APP and survey-based evidence. The variable is used in a time-varying coefficient VAR model with stochastic volatility to estimate the effects of the announcement shock. The evidence suggests that this shock had a significant upward effect on both real economic activity and HICP inflation in the euro area. The response of long-term interest rates gave rise to a flattening of the yield curve in the short term, followed by a steepening in the medium term. Several channels of transmission appear to have been activated, including the portfolio rebalancing channel, the exchange rate channel and the credit channel.

Employment hysteresis: an argument for avoiding front-loaded fiscal consolidations in the eurozone

The austerity policies applied by the eurozone peripheral governments under the Troika financial assistance programmes have contributed to a sharp reduction in aggregate demand, regardless of the unconventional measures undertaken by the European Central Bank (ECB). The ECB decreased the interest rate on the main refinancing operations to zero and has been buying assets from banks on a massive scale under the Expanded Asset Purchase Programme. The fact that these extraordinary measures have not been enough to promote a strong recovery shifts the focus back onto fiscal policy. The value of impact fiscal multipliers and the size of hysteretic effects are key factors for assessing the effects of fiscal policy. There is widespread evidence that public expenditure multipliers are greater than one, especially when the economy is depressed. However, less is known about the importance of hysteresis effects. Using the linear play hysteresis operator, we find that hysteresis effects are important in the eurozone peripheral countries. Large fiscal impact multipliers combined with the presence of hysteresis implies that front-loaded austerity depresses the economy in the short run, and these effects may persist in the long run.

Country-level effects of the ECB's expanded asset purchase programme

ABSTRACT This paper evaluates the macroeconomic effects of the European Central Bank's (ECB) Expanded asset purchase programme (APP) on Latvia and other euro area jurisdictions and investigates the cross-border transmission mechanism. To that end, we employ two different vector autoregressive (VAR) models, namely a bilateral structural VAR with block exogeneity (BSVAR-BE) and a multi-country mixed cross-section global VAR with stochastic volatility (MCS-BGVAR-SV). We find that the APP had a limited and weakly significant impact on Latvia's output while the effect on inflation has been robust due to depreciation of the euro. Regarding other jurisdictions, results suggest that the ECB's asset purchases had a larger impact on industrial production in the countries where it drove down long-term interest rates the most via portfolio rebalancing channel. Despite that, our evidence suggests that the APP was mainly transmitted to inflation via exchange rate depreciation rather than through aggregate demand-driven shifts in the Phillips curve.

Transmission Channels of Central Bank Asset Purchases in the Irish Economy

The European Central Bank (ECB) engaged in an expanded asset purchase programme (APP) from 2014 to 2018 to help achieve their primary objective of price stability. Total assets purchased over this period was over €2.5 trillion and new net purchases ended in December 2018. This paper identifies whether the ECB’s APP in Ireland operated through the portfolio rebalancing channel, the signalling channel or the lending channel. It presents a quantitative descriptive analysis of some key Irish data sets in the 2014–2018 period and uses time-series visualisation and trend analysis to identify trends and correlations. There are a number of preliminary findings. First, much downward pressure on sovereign debt yields and spreads had occurred before the APP began due to previous accommodative monetary policy and the signalling channel. Second, the corporate-sector purchase programme (CSPP) did impact on targeted bonds and may have had spill overs to non-targeted bonds. Third, the APP did not lead to much increased lending to the SME sector. Fourth, while households did engage in traditional portfolio rebalancing, Irish banks did not and were perhaps more motivated to meet their capital requirements and manage their level of reserves. This is a first step towards understanding the transmission channels of ECB policy in Ireland and more work needs to be done to detangle the transmission of the most recent APP from other factors and consider these findings in the context of theoretical models. Such work is important to help inform policy makers on enhancing the transmission mechanism to the Irish economy of the recently launched new ECB asset purchase programme from November 2019.

Interpreting TARGET balances in the European Monetary Union: A critical review of the literature

This is a review article focusing on the most important studies on the role displayed by TARGET balances in the European Monetary Union (EMU). In the context of the public debt financial crisis, large TARGET balances became crucial, reflecting funding stress in the banking systems of most crisis-hit countries. The increase in TARGET balances in this period was triggered by a replacement in these countries of private sector funding of banks by central bank funding. By contrast, the more recent increases in TARGET balances are largely attributable to the implementation of the expanded asset purchase program (EAPP) by the European Central Bank (ECB), also known as a quantitative easing (Qe) monetary policy. Nevertheless, we argue that the persistency of extremely large TARGET imbalances continues to be understood by financial markets as a signal of macroeconomic distress, which should be addressed to solve the underlying tensions among EMU member States.

The Effects of the Eurosystem's App on Euro Area Bank Lending: Letting Different Data Speak

We study the implications of the Eurosystem's expanded Asset Purchase Programme (APP) for the bank lending business of euro area banks with euro area non-financial corporations (NFCs) using microeconometric matching techniques. Based on confidential bank-level data on quantitative balance sheet items and interest rates as well as on qualitative survey responses to the Eurosystem's Bank Lending Survey, we identify the exposure of banks to the APP and corresponding effects on loan growth. We find that the APP was effective in stimulating the lending activity with NFCs for a subset of relatively sound banks. At the same time, our results show that there is a non-negligible number of banks with less healthy balance sheets which could not transfer the APP stimulus into more lending. Instead, such banks appear to have used the APP stimulus for consolidating their balance sheets, thereby also reducing their lending business with NFCs. This confirms the importance of accounting for the large degree of heterogeneity in the euro area banking sector in analyses of the effectiveness of monetary policy measures.

Role of Cross Currency Swap Markets in Funding and Investment Decisions

A US dollar funding premium in the EUR/USD cross currency swap market has been in existence since 2008. Whilst there are many reasons behind this dislocation, since 2014 the divergence in monetary policy between the euro area and the United States has played a growing role. This paper aims at exploring and gaining more insight into the role the Eurosystem’s Expanded Asset purchase Programme (APP) has had in guiding investment and funding decisions and its influence on the cross currency basis. The downward pressure on yields, exerted by the APP, has made euro assets less attractive and has led investors to search for yield abroad. At the same time, the decline in yields and tighter credit spreads have attracted US corporate issuers to the euro market in search of cheaper funding costs. These cross-border flows from issuers and investors have played a strong role in driving the US dollar funding premium. The purpose of this study is to gauge whether these changing trends in cross-border flows have implications for the implementation of the Eurosystem’s APP. Beyond the structural increase in the US dollar funding premium described above, a cyclical component has led to an amplification of the premium over balance sheet reporting dates, due to new bank regulations. This paper also analyses the behaviour of euro area banks in cross currency swap markets over balance sheet reporting dates, using the money market statistical reporting (MMSR) dataset in order to discern whether the increase in the US dollar funding premium at these specific points in time has an adverse impact on the transmission of monetary policy.

The Effect of the Eurosystem’s Expanded Asset Purchase Programme on Inflation Expectations: Evidence From the ECB Survey of Professional Forecasters

The Effect of the Eurosystem’s Expanded Asset Purchase Programme on Inflation Expectations: Evidence From the ECB Survey of Professional Forecasters

Macroeconomic effectiveness of non‐standard monetary policy and early exit. A model‐based evaluation

AbstractThis paper evaluates the macroeconomic effects of the Eurosystem's expanded asset purchase programme (APP) under alternative assumptions about (i) unwinding the asset positions accumulated under the APP and (ii) current and future paths of the policy rate (forward guidance). To this purpose, we simulate a New Keynesian model of the euro area (EA). Our results are as follows. First, if the monetary authority brings forward the unwinding of its long‐term sovereign bond holdings, the stimulus from the APP on inflation and economic activity is correspondingly reduced. Second, if the monetary authority communicates that the policy rate will be held constant for 1 year instead of 2, the APP would be less effective and the increase in inflation would be halved. Third, an early exit from bond holding subdues the impact of the APP, delaying the normalization of monetary policy conditions after a negative EA‐wide demand shock.

Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Asset Purchase Program

This paper examines the impact of Quantitative Easing (QE) in the Eurosystem on government bond yields and to what extent QE is causing government bond prices to deviate from their fundamental determinants. We apply a novel recursive estimation procedure developed by Phillips et al. (2015) to examine the existence of exuberant price behavior. The results show that government bond markets experienced exuberant price behavior in Euro Area countries following the announcement and implementation of several QE programs in 2014 and 2015. Especially the Public Sector Purchase Program (PSPP) contributed to exuberant price behavior as all countries experienced a divergence between observed and fundamental yield levels. However, almost no evidence of exuberance in government bond markets is found when QE policies are treated as drivers of government bond yields in addition to the traditional determinants. Given the influence of QE on government bond yields and prices, our findings imply that caution is warranted when this policy is eventually reversed.

European Monetary Measures to Support Economic Recovery

The present article aims to look at the current monetary measures deployed by ECB to address the economic context of below expectations economic growth and inflation, taking into account the expression of monetary policy via the Expanded Asset Purchase Programme. This tool is used to push financial liquidity into the economies of the European Union, in a banking system affected by the crisis and which has been shown to be still at risk by the latest stress tests conducted by the European Banking Authority. The article points out why monetary measures are important to support the economic recovery in Europe, in an interventional context of monetary and fiscal policies of governing authorities, appealing to economic models to explain how the policies contribute to economic growth and development. The methodology used by the article is economic analysis and rationale, cost-benefit analysis, statistics of money market and banking industry indicators, etc. The conclusion emerging from this article is that the Asset Purchase Programme of ECB led in a certain degree to an improvement in the macro-economic environment on yields and on its transmission channels into the financial system and into economies.

Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Asset Purchase Program

This paper examines whether the ECB's Quantitative Easing (QE) policy is causing government bond prices to deviate from their fundamental value. We use a recent advance in the methodology to measure exuberant price behavior in financial time series introduced by Phillips et al. (2015). We extend this methodology and apply it to government bond prices. The results show that the QE policy substantially inflated government bond prices in Euro Area countries to such an extent that bond prices are no longer in line with the underlying fundamental value. We argue that careful monitoring is required when the QE policy is eventually reversed. The test procedure outlined in this paper provides a monitoring tool to do so.

Mind the Output Gap: The Disconnect of Growth and Inflation During Recessions and Convex Phillips Curves in the Euro Area

We develop a theoretical model that features a business cycle-dependent relation between out- put, price inflation and inflation expectations, augmenting the model by Svensson (1997) with a nonlinear Phillips curve that reflects the rationale underlying the capacity constraint theory (Macklem (1997)). The theoretical model motivates our empirical assessment for the euro area, based on a regime-switching Phillips curve and a regime-switching monetary structural VAR, employing different filter-based, semi-structural model-based and Bayesian factor model-implied output gaps. The analysis confirms the presence of a pronounced convex relationship between inflation and the output gap, meaning that the coefficient in the Phillips curve on the output gap recurringly increases during times of expansion and abates during recessions. The regime switching VAR reveals the business cycle dependence of macroeconomic responses to monetary policy shocks: Expansionary monetary policy induces less pressure on inflation at times of weak as opposed to strong growth; thereby rationalizing relatively stronger expansionary policy, including unconventional volume-based policy such as the Expanded Asset Purchase Programme (EAPP) of the ECB, during times of deep recession. JEL Classification: E31, E42, E52, E58

The Macroeconomic Impact of the ECB's Expanded Asset Purchase Programme (APP)

This paper provides empirical evidence on the macroeconomic impact of the expanded asset purchase programme APP) announced by the European Central Bank (ECB) in January 2015. The shock associated to the APP is identified with a combination of sign, timing and magnitude restrictions in the context of an estimated time-varying parameter VAR model with stochastic volatility. The evidence suggests that the APP had a significant upward effect on both real GDP and HICP inflation in the euro area during the first two years. The effect on real GDP appears to be stronger in the short term, while that on HICP inflation seems more marked in the medium term. Moreover, several channels of transmission appear to have been activated, including the portfolio rebalancing channel, the exchange rate channel, the inflation re-anchoring channel and the credit channel. JEL Classification: C32, E44, E52, E58

Macroeconomic Effectiveness of Non-Standard Monetary Policy and Early Exit. A Model-Based Evaluation

This paper evaluates the macroeconomic effects of the Eurosystem’s expanded Asset Purchase Programme (APP) under alternative strategies as regards (i) the unwinding of asset positions accumulated under the APP and (ii) communication of current and future paths of the policy rate (forward guidance). To this purpose, we simulate a New Keynesian model of the euro area. Our results are as follows. First, as the monetary authority brings forward the selling of long-term sovereign bonds, the stimulus from the APP on inflation and economic activity is correspondingly reduced. In particular, if the bonds are sold immediately after purchases end, the impact on inflation is negligible. Second, if the monetary authority communicates that it will hold the policy rate constant for one year instead of two, the APP is less effective, and the inflation increase is halved. Third, the subdued impact of the APP associated with an early exit from the programme delays the return to a standard monetary policy regime.

Domestic and International Macroeconomic Effects of the Eurosystem Expanded Asset Purchase Programme

This paper evaluates the domestic and international macroeconomic effects of purchases of domestic long-term sovereign bonds by the Eurosystem. To this end, we calibrate a five-country dynamic general equilibrium model of the world economy. According to our results, the sovereign bond purchases would generate an increase in economic activity and in inflation in the euro area of about one percentage point in the first two years by inducing a fall in the long-term interest rates and an increase in liquidity. International spillovers may be nontrivial and expansionary, depending on the monetary policy stance of the partner countries and on the response of international relative prices.

The Effect of Quantitative Easing on Lending Conditions

We analyze the effect of the ECB’s Quantitative Easing program (Expanded Asset Purchase Program - EAPP) on bank lending using security-level bank balance sheet data combined with comprehensive credit register data from Portugal. Our identification relies on the fact that only a subset of Portuguese banks was exposed to QE via prior holdings of EAPP-eligible securities. Using a difference-in-differences specification, we find that QE has the strongest effect on the formation of new credit relationships. We find that loan approval rates for new corporate clients are 20 percentage points higher at exposed relative to non-exposed banks following the announcement of QE. The increase in loan approval rates at exposed banks is particularly pronounced for riskier firms. Credit to existing corporate clients grows about 2% faster at exposed banks relative to non-exposed banks following QE. This result is robust to including both bank and borrower*month fixed effects, as well as a wide range of loan and borrower characteristics. Finally, there is evidence that interest rates on new loans, in particular loans to new clients, experience a general decline following the QE announcement. This decline is more pronounced for exposed banks immediately after the announcement.

Global Macroeconomic Effects of Exiting from Unconventional Monetary Policy

This paper evaluates the international macroeconomic spillovers from the Eurosystem’s expanded Asset Purchase Programme (APP) under alternative assumptions as regards (i) the unwinding of the asset positions accumulated under the APP and (ii) the normalization of the US monetary policy stance. We simulate a dynamic general equilibrium model of the world economy, calibrated to the Euro area (EA), the US, China, Japan, and the ‘rest of the world’ (RW). Our results are as follows. First, APP expansionary spillovers are dampened if the Eurosystem brings forward the unwinding of its bond holdings because of the lower increase in EA aggregate demand and, therefore, EA imports. The RW is the region most affected because it has the greatest trade integration with the EA. Second, if the US monetary authority announces that it will hold the policy rate constant for a shorter period of time – which dampens the increase in US aggregate demand and, therefore, US imports from the EA – then US spillovers to the EA, while still expansionary, as in the case of a slower normalization of the monetary policy stance, are more modest.