Market-stabilization QE

Roberto Motto and Kadir Özen

No 2640, Working Paper Series from European Central Bank

Abstract: We identify a novel dimension of monetary policy from high-frequency changes in asset prices around ECB policy events, orthogonal to surprises extracted from risk-free interest rates. We find that it is present in policy events that were interpreted by real-time market commentaries as containing information about asset purchase programmes aimed to stabilise financial markets and safeguard the monetary policy transmission by implementing asset purchases in a flexible manner across asset classes and euro area countries. We label this dimension of policy “market-stabilization QE” to contrast it with conventional QE programmes such as the APP launched by the ECB in 2015 aimed to extract duration risk. When including our market-stabilization QE, the R2 for the regression of sovereign yields during the sovereign debt crisis increases by about 50 percentage points and the one of the stock market by 35 percentage points; during the COVID-19 pandemic by 25 and 15 percentage points, respectively. Although it moves euro area stressed-country sovereign yields down and German sovereign yields up as a result of the reversal of flight-to-safety dynamics, it generates strong expansionary macroeconomic effects in all euro area countries including Germany. JEL Classification: E43, E44, E52, E58, E65, G01, G14

Keywords: Central Bank Communication; COVID-19 pandemic; European debt crisis; monetary policy shocks; unconventional monetary policies (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
Note: 364643
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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