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On the effectiveness of the European Central Bank’s conventional and unconventional policies under uncertainty

Niko Hauzenberger, Michael Pfarrhofer () and Anna Stelzer

Journal of Economic Behavior & Organization, 2021, vol. 191, issue C, 822-845

Abstract: In this paper, we investigate the effectiveness of conventional and unconventional monetary policy measures by the European Central Bank (ECB) conditional on the prevailing level of uncertainty. To obtain exogenous variation in central bank policy, we rely on high-frequency surprises in financial market data for the euro area (EA) around policy announcement dates. We trace the dynamic effects of shocks to the short-term policy rate, forward guidance and quantitative easing on several key macroeconomic and financial quantities alongside survey-based measures of expectations. For this purpose, we propose a Bayesian smooth-transition vector autoregression (ST-VAR), using a measure of economic policy uncertainty as signal variable. Our results suggest that transmission channels are impaired when uncertainty is elevated. While conventional monetary policy and forward guidance can be less effective during such periods, quantitative easing measures seem to work comparatively well in uncertain times.

Keywords: Euro area; Monetary policy; Bayesian smooth-transition vector autoregression; Hierarchical global-local shrinkage (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 E58 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jebo.2021.09.041

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