Assessing the European Central Bank’s Unconventional Measures – a Recursive VAR Approach
Journal
BH Economic Forum
Date Issued
2021
Author(s)
Abstract
Unconventional monetary measures utilization has proven to be of great importance
in maintaining monetary and economic stability after the Great Recession. However,
we aim to test this conclusion through the impact of the quantitative easing implemented
by the European Central Bank. Observed through generated shocks in the
balance sheet of the Eurosystem as our main variable, we tested whether quantitative
easing reestablished economic growth and rose price levels, mainly through lowering
borrowing costs for banks, thus helping in the post-crisis recovery. To prove our
hypotheses we construct a recursive VAR model estimated in levels using 2014M05-
2018M12 data. The model incorporates variables such as the industrial production
and the HICP, as output and price level proxies, and financial components such as
the EONIA-MRO spread and the CISS index. The results show that the expansion
shocks of the consolidated balance sheet have a positive temporary influence on
industrial production and the HICP, but the reaction of the former seems to be 2.24
times greater. On the other hand, we find out that quantitative easing has an expected
negative impact in widening the EONIA-MRO spread. Furthermore, we could not
confirm the theoretically expected accommodative impact on financial stress.
in maintaining monetary and economic stability after the Great Recession. However,
we aim to test this conclusion through the impact of the quantitative easing implemented
by the European Central Bank. Observed through generated shocks in the
balance sheet of the Eurosystem as our main variable, we tested whether quantitative
easing reestablished economic growth and rose price levels, mainly through lowering
borrowing costs for banks, thus helping in the post-crisis recovery. To prove our
hypotheses we construct a recursive VAR model estimated in levels using 2014M05-
2018M12 data. The model incorporates variables such as the industrial production
and the HICP, as output and price level proxies, and financial components such as
the EONIA-MRO spread and the CISS index. The results show that the expansion
shocks of the consolidated balance sheet have a positive temporary influence on
industrial production and the HICP, but the reaction of the former seems to be 2.24
times greater. On the other hand, we find out that quantitative easing has an expected
negative impact in widening the EONIA-MRO spread. Furthermore, we could not
confirm the theoretically expected accommodative impact on financial stress.
Subjects
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