A Tale of Two Decades: The Ecb's Monetary Policy at 20

The effects of Federal Reserve's quantitative easing and balance sheet normalization policies on long-term interest rates

“…14 Central bank purchases of longer-term securities reduce the amount of duration risk to be borne by the private sector, while increasing the short-term risk-free bank reserves in the system. As a result, central bank purchases decrease the market price of duration risk and the expected return (term premium) on purchased securities has to fall relative to the expected return that investors can earn on an alternative roll-over strategy at the risk-free rate for the same term to maturity (Rostagno et al, 2019). Moreover, investors are induced to reallocate the liquidity acquired and their portfolio toward other types of assets.…”

Rate Forward Guidance in an Environment of Large Central Bank Balance Sheets: A Eurosystem Stock-Taking Assessment

“…A third approach to assessing FG in time-series models is based on exploiting Google search data. This is proposed in Rostagno et al (2019), and is based on employing Google Trend data to derive a time series for FG impulses that is able to account for anticipation effects. This "FG factor" is used to estimate the effects of rate FG on euro area forward rates at short to medium maturities.…”

“…On the impact of a DFR cut in negative territory on the term structure, and the conceptual framework rationalising it, see Rostagno et al (2019), in particular Box B.10 entitled "Breaking through the lower bound -inspecting the mechanism in a two-period model".…”

Monetary Policy Communication: Perspectives from Former Policy Makers at the ECB

“…The earlier formulation had received considerable criticism for being imprecise (Paloviita et al 2021 estimate the de facto inflation target of the ECB to be between 1.6 and 1.8%) and as giving the impression of being asymmetric (Miles et al 2017;Hartmann and Smets 2018). It has also been argued that the formulation served the ECB well in the years prior to the global financial crisis when inflation was relatively high, but less so subsequently, when monetary policy was constrained by the effective lower bound and the ECB struggled to bring inflation back up to target (Rostagno et al 2019). Earlier surveys among households also made it apparent that knowledge about the ECB's inflation target is rather limited, but that consumers with better knowledge of the ECB's objective form superior inflation expectations (van der Cruijsen et al 2015).…”

“…inflation would be less firmly anchored had served in more recent times (at the time or since President Draghi delivered his whatever it takes speech). These respondents had served during a period in which price shocks were almost always to the upside and the hard ceiling offered by the "below, but close to, 2%" inflation aim would have functioned as a key shock absorber (Rostagno et al, 2019).…”