Assessing the sources of heterogeneity in eurozone response to unconventional monetary policy

In this paper, we aim at explaining a specific type of heterogeneity in the euro area pertaining to the diverging responses of countries and sectors to the European Central Bank’s Unconventional Monetary Policy. Equipped with stock markets indices of 17 sectors for each euro area country, we first preform an event-study analysis to assess the reaction of the markets. Next, we regress the responses on a set of country-specific drivers. Our main findings show that variables related to the nature of banking industry (e.g. cost-to-income, return on assets), macroeconomic environment (e.g. gross debt) and macroprudential policy all contribute to observe diverging responses to ECB’s monetary policies. While some sectors and countries responded more negatively than positively to the policies, the Unconventional Monetary Policy impacts the markets positively on average. A policy implication is that the heterogeneous response calls for domestic structural reforms that should target the discrepancies in the banking and the macroeconomic environments across euro area countries.