International Spillovers of Non-standard Monetary Policy: Evidence From Central and Eastern Europe

Among the non-standard monetary measures used by the European Central Bank (ECB), asset purchase programmes (APPs) have been gaining increasing importance in the last couple of years, accounting for about half of total assets in the Eurosystem’s balance sheet as of late 2016. This chapter aims to gauge the impact of the ECB’s APPs on the financial markets of a set of Central, Eastern and South Eastern European (CESEE) economies. We find that the APPs implementation contributed to supporting cross-border portfolio investment flows to, and foreign bank claims into, CESEE economies mainly in an indirect way—i.e. through their impact on certain liquidity and financial condition indicators in the euro area—therefore revealing the existence of both a portfolio rebalancing and a banking liquidity channel of transmission. Without such non-standard monetary measures, both types of cross-border capital flows would have been weaker and financial conditions in CESEE economies more stringent than they actually were. In fact, we also show that the implementation of the ECB’s APPs had the effect of lowering both policy and long-term interest rates to levels well below those predicted on the basis of similarities in business cycles or global risk factors. These effects may not have been entirely unwelcome during the recent period of sub-par growth and unusually low inflation, but may pose relevant policy challenges going forward, against the background of a cyclical divergence between CESEE countries and the euro area economy.