ECB Spillovers to Emerging Europe: The Past and Current Experience

Philipp Engler, Gianluigi Ferrucci, Pawel Zabczyk and Tianxiao Zheng

No 2024/170, IMF Working Papers from International Monetary Fund

Abstract: We provide new evidence on the spillover effects of ECB monetary policy shocks to emerging European economies, using a combination of empirical methods and model-based simulations and focusing on spillovers from interest rate and balance sheet policies implemented by the ECB. We consider an event study set around the ECB policy announcement in June 2022 and also use local projections to estimate regional spillovers in a panel of 16 Emerging European countries spanning 1999 to 2022. Identifying ECB monetary policy shocks as the unexplained component of changes in the three-month Euribor futures rate, we find that ECB monetary policy tightening induces more than one-for-one changes in government bond yields in Emerging Europe, as well as sizable increases in sovereign spreads, domestic currency depreciations, and significantly lower output. Model simulations using a two-country DSGE calibrated to the euro area and its Eastern European neighbors reveal that a conventional tightening, achieved through interest rate increases, provides a more favorable inflation-output trade-off compared to balance sheet tightenings. The extent of spillovers from quantitative tightening depends on the speed of balance sheet reduction, and it is larger under a fixed exchange rate regime.

Keywords: Monetary Policy; Quantitative Easing; International Spillovers; ECB monetary policy tightening; ECB policy announcement; ECB spillover; ECB monetary policy shock; monetary policy spillover; ECB asset purchase portfolio; Spillovers; Exchange rate arrangements; Monetary tightening; Central bank policy rate; Exchange rates; Europe; Global; Eastern Europe (search for similar items in EconPapers)
Pages: 32
Date: 2024-08-09
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mon and nep-opm
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