The effect of ECB monetary policies on interest rates and volumes

ABSTRACT

This article assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes or bond issuance for three types of different economic agents through five different markets: sovereign bonds at 6-month, 5-year and 10-year horizons, loans to nonfinancial corporations and housing loans to households, during the financial crisis, and for the four largest economies of the euro area. We look at three different unconventional tools: excess liquidity, longer-term refinancing operations and securities held for monetary policy purposes following the decomposition of the ECB’s Weekly Financial Statements. We first identify series of ECB policy shocks at the euro area aggregate level by removing the systematic component of each series and controlling for announcement effects. We second include these exogenous shocks in country-specific structural VAR, in which we control for credit demand. The main result is that only the pass-through from the ECB rate to interest rates has been effective. Unconventional policies have had uneven effects and primarily on interest rates.

KEYWORDS:

• Transmission channels
• unconventional monetary policy
• quantitative easing
• pass-through
• bank lending

JEL CLASSIFICATION:

• E51
• E52
• E58

Acknowledgements

We thank two anonymous referees, Antonio Afonso, Christophe Blot, Nick Butt, Rohan Churm, Fabien Labondance, Grégory Levieuge, Patrizio Tirelli and participants at OFCE seminar (Paris), ISEG seminar (Lisbon), the 2013 FESSUD annual conference, the 2014 Eastern Economic Association conference, the 2014 ICMAIF conference, the 2014 French Economic Association (AFSE) conference, and the 2014 GDRE Money, Banking and Finance conference for helpful comments. This article previously circulated under the title ‘Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies’. Any remaining errors are our own responsibility.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For the US, see Bernanke, Reinhart and Sack (2004)’s indirect evidence or more recently, Fleming, Hrung and Keane (2010), Hrung and Seligman (2011), Krishnamurthy and Vissing-Jorgensen (2011), Thornton (2011), Stroebel and Taylor (2009), Altavilla and Gianonne (2014) among others; for the UK, Joyce et al. (2011), Joyce (2012) and Butt et al. (2014).

² OMT measures (not operational yet) involve the purchase of public bonds up to 3-year maturity.

³ https://www.ecb.europa.eu/press/pr/wfs/2015/html/index.en.html

⁴ Because the ‘Whatever it takes’ of Mario Draghi on July 26, 2012 and the OMT program do not appear anywhere in the ECB’s WFS, we are not able to assess their macroeconomic impact. This could only be done through event studies measuring the confidence and signalling channels of their announcements, which goes beyond the scope of this article.

⁵ Together, they represent 25% of the French newly issued sovereign debt (9% for 6-month maturity bonds, 8% for 5-year maturity bonds and 8% for 10-year bonds), 32% of the Spanish one (2% for 6 months, 14% for 5 years, 16% for 10 years), 49% of the Italian one (26% for 6 months, 12% for 5 years and 11% for 10 years), 58% of Germany’s (21% for 6 months, 17% for 5 years and 20% for 10 years).

⁶ In each country, cash loans represent 30% of all loans to households on average over the sample. The variance of interest rates on housing loans is 9 times higher than the variance of interest rates on cash loans in Germany, 3 times higher in Italy, 30% higher in France and 18% higher in Spain.

⁷ Alternatives include instrumental variables but there is no obvious relevant instrument to our knowledge, or usual VAR sign restrictions but they need strong theoretical priors, while our stance here is to let the data speak.

⁸ The estimated four shocks from Equation 1 used in Equation 3 are generated regressors that might cause biased SEs (Saxonhouse 1976). This issue is common to all empirical studies that estimate exogenous shocks in a first step as in Romer and Romer (2004), but is more acute when the generated regressors are not normally distributed, which is not the case of the estimated residuals from Equation 1 – see Figure A1 in the Appendix.

Additional information

Funding

This work was supported by the European Union Seventh Framework Programme (FP7/2007-2013) [grant number n°266800 (FESSUD)].