Assessing the Efficacy, Efficiency and Potential Side Effects of the ECB's Monetary Policy Instruments Since 2014

Abstract

This paper summarises the work done by Eurosystem staff in the context of the Strategy Review Seminar on Monetary Policy Instruments. More specifically, it focuses on the efficacy, efficiency and potential side effects of the key monetary policy instruments employed by the European Central Bank since 2014. The following main findings emerge from the analysis. First, instruments have been effective in easing financing conditions and supporting economic growth, employment and inflation. Second, considering the effective lower bound on policy rates, a combination of instruments is generally more efficient than relying on a single tool. Third, side effects have been generally contained so far, but they are found to vary over time and need to be closely monitored on an ongoing basis. Fourth, the monetary policy toolkit needs to remain innovative, diversified, and flexible, i.e. reviewed regularly to ensure that it remains fit for purpose against the backdrop of evolving financial and macroeconomic conditions.

On the Macroeconomic Effects of Reinvestments in Asset Purchase Programmes

“…Considering these is important in order to better understand the central bank's options for fulfilling its mandate. A complete analysis of those costs is beyond the scope of this paper (for a discussion of side effects, see, for instance, Altavilla, Lemke, Linzert, Tapking and von Landesberger, 2021). The figure shows the interest rate (left panel), inflation rate (middle panel) and the assets on the central bank's balance sheet (right panel) of a particular stoachstic simulation.…”

Dynamic Connectedness between Credit and Liquidity Risks in EMU Sovereign Debt Markets

“…In this regard, although there has been some debate and concerns regarding the potential adverse impacts of ECB asset purchases on bond market liquidity or on the crowding out of other investors, our results are in line with those of Jurksas et al (2018) who analyse a range of euro area sovereign bond market liquidity metrics for the period between the start of the PSPP and early 2018 and suggest that the liquidity situation in euro area sovereign bond market did not deteriorate over this horizon despite the build-up of PSPP holdings. Indeed, Altavilla et al (2021) state that, on balance, the available empirical evidence does not point to a deterioration in sovereign bond market liquidity since the start of the asset purchase programme (APP) in 2015; and Buis et al (2020) show that liquidity dynamics in the euro area sovereign bond market do change over this period, where the ECB becomes an important liquidity provider when it commences its UMP, alongside the sovereign. Afonso All in all, the event study illustrates how different ECB measures, including unconventional policy actions, influence net pairwise directional connectedness of credit and liquidity risk in government bond yields of all euro area countries.…”

Navigating the Housing Channel of Monetary Policy Across Euro Area Regions

“…Most contributions examine the issue at the household or individual level. Some studies find that expansionary monetary policy can mitigate income inequality as lower-income households disproportionately benefit from positive effects via the stimulus to economic activity and employment, which outweigh those via financial markets (for the US, see Coibion et al, 2017; for the euro area, see Casiraghi et al, 2018, Lenza and Slacalek, 2021and Altavilla et al, 2021. This stands in contrast to Amberg et al (2021), who show that the income response to monetary policy in Sweden is U-shaped, and to Andersen et al (2020), who find that monetary easing in Denmark raises income shares at the top of the income distribution while reducing them at the bottom, hence leading to higher income inequality.…”