Central bank policies and financial markets: Lessons from the euro crisis

Ashoka Mody and Milan Nedeljkovic

Journal of Banking & Finance, 2024, vol. 158, issue C

Abstract: In a novel econometric framework, we identify differences and significant asymmetries in financial markets' responses to the European Central Bank (ECB)'s various policy interventions during the eurozone crisis. Dollar liquidity interventions reduced stress in bond markets and improved economic sentiment, as reflected in higher equity prices. In contrast, the ECB's euro liquidity provisions and monetary stimulus measures delivered modest results. In both these cases, government bond spreads typically did decline but the risk of large spread increases and equity losses also increased. Only the Outright Monetary Transactions (OMT) intervention had a substantial expansionary effect. The results emphasize the importance of unambiguous monetary policy for driving market expectations.

Keywords: Monetary policy; Euro crises; Uncertainty; Conditional quantiles; MCMC (search for similar items in EconPapers)
JEL-codes: C32 C38 E44 E58 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:158:y:2024:i:c:s0378426623002248

DOI: 10.1016/j.jbankfin.2023.107033

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