EFFECTIVENESS OF NON-CONVENTIONAL MONETARY POLICY TOOL: EVENT-STUDY ANALYSIS OF MAJOR EUROZONE ECONOMIES

Muhammad Zubair

Abstract


This study examines the effectiveness of European Central Bank asset purchase program (quantitative easing) on the long-term interest rates. In particular, the study evaluates the effectiveness or influence of the European Central Bank’s non-conventional monetary policy tool, quantitative easing (also known as asset purchase program) on the yield of  5-year sovereign government bonds of Eurozone economies. The main objective and the motivation for this study is to provide the compact effects or influence of the quantitative easing in the Eurozone economies, as the current literature on quantitative easing insufficiently covers the effects of quantitative easing in the euro area. The duration of the quantitative easing or asset purchase program is from the end of 2014 until the first quarter of 2017; however, the currently available literature only studies the effects of the asset purchase program until mid of 2016. Very few researches are published after the completion of the quantitative program that estimates or evaluate the complete influence of the program on the long-term interest rates and economic indicators. Whereas, this research provides a complete solution to the literature gap by studying the influence of all the quantitative easing related announcements made by ECB from June 2014 to January 2017, or the whole period of extended asset purchase program conducted by ECB.

            The research questions that the study aims to answer is that if the ECB announcements related to quantitative easing influence the long-term interest rates via influencing the 5-year government bonds. If the impact on the 5-year government bond yield is only influenced by those ECB announcements that contain new information related to asset purchase program. If the impact of quantitative easing or asset purchase program is larger on the weaker Eurozone economies namely Spain and Italy, as compared to the impact of the same program on stronger Eurozone economies including Germany and France

            This research uses the event-study analysis methodology. Under the event study method, the research first estimates the abnormal variation in the yield of 5-year government bonds of the four largest Eurozone economies around the announcements made by European Central Bank regarding the quantitative easing or asset purchase program in the monetary policy statement. Later the study evaluates if abnormal variation in 5-year government bond yield around such announcements has statistical and economic significance. The sample of four 5-year government bonds of the four largest economies of Eurozone, namely Germany, France, Spain, and Italy, are considered for the research..

            The research made key contributions to the literature on the subject of quantitative easing focused on the euro area. The statistical results of the research conclude that the ECB announcements negatively (decrease) influence the 5-year government bond yields. While the event-study results and the hypothesis revolve around measuring the effectiveness and influence of the non-conventional monetary policy tools used by ECB, the study also discovered a key pattern that the influence of such asset purchase program is much larger on weaker economies of the dataset like Spain and Italy, as compared to strong candidates i.e. Germany and France. The study also discovered that the abnormal variations in yields only occur around those central bank announcement that has a surprise element or that has a new information related the monetary policy.

            The results of the study also show economic significance. The results show that at the initiation of the asset purchase program or quantitative easing, the inflation rates across Europe were between -1% to 0.8%, which is far below the optimal inflation rate of 2%. However, at the end of asset purchase program in the first quarter of 2017, the monthly inflation rates in Germany, France, Spain and Italy has increased to 2%, 1.4%, 2.6% and 2% respectively. At the beginning of the asset purchase program the quarterly GDP growth rate in sample countries was between -0.2% to 0.4%, whereas, at the end of the asset purchase program or quantitative easing in the second quarter of 2017, the quarterly GDP growth rate of Germany, France, Spain and Italy increased to 0.6%, 0.5%, 0.9% and 0.4% respectively. Hence all the results derived from the event-study analysis are consistent with the hypothesis proposed under this research.

 

JEL: E31, E4, E5

 

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Keywords


quantitative easing, ECB, QE, event study, money market, bond, euro bond market

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