February 6, 2018

The effects of unconventional monetary policy in the euro area

How effective are unconventional monetary policies? Through which mechanisms do they work? Central banks have been conducting monetary policy through unconventional means such as expanding their balance sheets or forward guidance because the conventional instrument of monetary policy, the short-term policy rate, has been at or close to the zero lower bound since shortly after the fall of Lehmann Brothers. These unconventional monetary policies are new and bring with them many questions, which were addressed in the CPB policy brief ‘Onderweg naar normaal monetair beleid’ [CPB policy brief 2017/07, 8 June 2017]. Understanding how and why unconventional monetary policy works is a crucial first step for answering subsequent questions, such as the likely effects of the withdrawal of unconventional monetary policy, or about how domestic policy makers can best respond. This discussion paper contains a detailed presentation of the new scientific evidence we reported in the policy brief, and adds to the relatively scarce literature in this field

We estimate the effects of unconventional monetary policy shocks on output and inflation in the euro area using data from 2009 to 2016, which covers the period of all of the major unconventional monetary policies that the ECB has used. We employ a two stage estimation strategy: first, we identify unconventional monetary policy shocks in a dedicated euro area level structural vector autoregression (SVAR) model. Subsequently we use these unconventional monetary policy shocks in country level models. By estimating the effects of unconventional monetary policy shocks in the individual countries of the euro area, we aim to shed some light on the most important transmission mechanisms through which unconventional monetary policy works.

We find weak evidence that expansionary unconventional monetary policy shocks increase output growth, but the effects on inflation at the aggregate euro area level are economically insignificant. At the individual country level we find a range of responses across the countries in our sample, and those differences in the magnitudes of output responses are consistent with some of the transmission channels that have been proposed for how unconventional monetary policy works. Interestingly, though, we find that healthier banking systems at the start of our sample and lower government debts are associated with larger peak output responses. This is the opposite of what the bank lending channel predicts, which is one of the most important proposed channels. We are not the only authors to have found this, for example Van Dijk and Dubovik (2018) also find no evidence of the bank lending channel when they focus on the effect of the announcement of the ECB’s Asset Purchase Programme in January 2015 on lending rates.

February 2019: Subsequent research (CPB Discussion  Paper 391) shows that the technique employed in this discussion paper does not provide reliable estimates of the effects of unconventional monetary policy.


Kan Ji
Sem Duijndam