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Macroeconomic effects of the ECB’S forward guidance

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  • Andrejs Zlobins

    (Latvijas Banka)

Abstract

This paper evaluates the macroeconomic effects of the European Central Bank’s (ECB) forward guidance (FG) in the euro area and analyses its interaction with asset purchases. To that end, we employ a battery of structural vector autoregressions (VARs) with both constant and time-varying parameters and/or the error covariance matrix to explore the propagation of the FG shock over time and account for the changing nature of the ECB’s FG. The FG shock is identified via traditional sign and zero restrictions of Arias et al. (Econometrica 86(2): 685–720, 2018), narrative sign restrictions of Antolin-Diaz and Rubio-Ramirez (Am Econ Rev 108(10):2802–2829, 2018) and high-frequency information approach akin to Andrade and Ferroni (J Monet Econ, 2020) and Jarocinski and Karadi (Am Econ J Macroecon 12(2):1–43, 2020). We find that the ECB’s forward guidance on interest rates has been an effective policy tool as its announcement causing a 5 bps drop in interest rate expectations increases output by 0.09–0.12% and the price level by 0.035%. In addition, multiple evidence suggests that the introduction of the Asset Purchase Programme (APP) in 2015 considerably enhanced the credibility of FG. Regarding the transmission mechanism, we find that FG significantly lowered uncertainty in the euro area as well as borrowing costs for both households and firms.

Suggested Citation

  • Andrejs Zlobins, 2021. "Macroeconomic effects of the ECB’S forward guidance," Empirical Economics, Springer, vol. 61(5), pages 2587-2611, November.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:5:d:10.1007_s00181-020-01981-6
    DOI: 10.1007/s00181-020-01981-6
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    Cited by:

    1. Müller, Tobias & Christoffel, Kai & Mazelis, Falk & Montes-Galdón, Carlos, 2022. "Disciplining expectations and the forward guidance puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    2. Ferreira, Leonardo N., 2022. "Forward guidance matters: Disentangling monetary policy shocks," Journal of Macroeconomics, Elsevier, vol. 73(C).
    3. Coenen, Günter & Montes-Galdón, Carlos & Saint Guilhem, Arthur & Hutchinson, John & Motto, Roberto, 2022. "Rate forward guidance in an environment of large central bank balance sheets: a Eurosystem stock-taking assessment," Occasional Paper Series 290, European Central Bank.
    4. Skouralis, Alexandros, 2021. "The role of systemic risk spillovers in the transmission of Euro Area monetary policy," ESRB Working Paper Series 129, European Systemic Risk Board.
    5. Andrejs Zlobins, 2021. "On the Time-varying Effects of the ECB's Asset Purchases," Working Papers 2021/02, Latvijas Banka.

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    More about this item

    Keywords

    Forward guidance; Central bank communication; Unconventional monetary policy; Euro area; Structural VAR;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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