International spillovers of ECB’s unconventional monetary policy: the effect on Central Europe

ABSTRACT

We examine how unconventional monetary policy of the European Central Bank (ECB) influences macroeconomic stability in three Central European economies. We estimate various panel vector autoregressions (PVARs) using monthly data from 2008 to 2014. Using the shadow policy rate and central bank assets as measures of unconventional policies, we find that output growth and inflation in Central Europe temporarily increase following an expansionary unconventional monetary policy shock by the ECB. Using both impulse responses and variance decompositions, we find that the effect of unconventional policies on output growth is much stronger than the effect on inflation.

KEYWORDS:

• Unconventional monetary policy
• ECB
• Central Europe
• panel vector autoregression

JEL CLASSIFICATION:

• E52
• E58

Acknowledgements

We thank anonymous referee, Arne Halberstadt, John B. Taylor and seminar participants at the Central Bank of Hungary, ICMAIF conference (Rethymno) at IOS (Regensburg) for helpful comments. We acknowledge the support from the Grant Agency of the Czech Republic P402/12/G097. We appreciate the use of panel VAR package developed by Michael Ralph Abrigo and Inessa Love.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We do not include Slovakia because this country became the member of the euro area in 2009.

² The Federal Reserve Bank of Atlanta hosts the Wu and Xia shadow policy rate estimates and appears to regularly update them at https://www.frbatlanta.org/cqer/research.aspx.

³ The series is freely available at the Federal Reserve Bank of Atlanta: https://www.frbatlanta.org/cqer/research.aspx or at the website of Jing Cythia Wu: http://faculty.chicagobooth.edu/jing.wu/index.html.

⁴ In addition, we also control for the euro area prices and GDP but find these variables rarely significant for the Central European output and prices. Their insignificance is not so surprising because the euro area shocks are likely to be transmitted via interest rates or exchange rates. The euro area GDP and price is also insignificant for the shadow rate. This result is likely to be due to the inclusion of implied volatility of stock markets variable, which seems to sufficiently capture the macroeconomic conditions and uncertainty during the crisis. Therefore, we prefer a more parsimonious model without these variables, especially because the results are largely similar. These results are available upon request.

⁵ Therefore, our approach allows the lagged Central European variables to affect the euro area variables. Eventually, we could impose block restriction such as the Central European variables would never affect the euro area variables, but, to our knowledge, the block restriction version of PVAR is not available.

⁶ The package is freely downloadable from https://sites.google.com/a/hawaii.edu/inessalove/home/pvar.

⁷ We also estimated the PVAR without domestic interest rates. The impulses of shadow rate on the responses of GDP growth and inflation remained largely unchanged.

Additional information

Funding

This work was supported by the Grantova Agentura, Univerzita Karlova to Grantová Agentura České Republiky [P402/12/G097].