Is ECB Rocking the Boat? Unconventional Monetary Policy in the EMU and Volatility Spillovers to Poland

ABSTRACT

The aim of the paper is to investigate volatility spillovers (i.e., spillovers in-variance) between the monetary policy stance of the European Central Bank and macro-financial variables in Poland. The monetary policy of the ECB is approximated by the shadow interest rate which takes into account various non-standard policy measures. We then perform event study regressions using several leading policy announcements and actions of the ECB. We find that volatility spillovers from the ECB’s unconventional policies to Poland were time-varying but modest for the entire period of 2008–2018. There is relatively scarce evidence on the structural changes in the dynamic conditional correlations for the POLONIA rate and EUR/PLN exchange rate. More pronounced volatility spillover effects are identified for the long-term interest rates after the first substantial reduction of interest rates in the EMU in 2008, and following the introduction of the negative interest rate policy in 2014. We find no significant evidence of spillovers associated directly with the implementation of more advanced unconventional tools, such as long-term refinancing operations or the Asset Purchase Programme.

KEYWORDS:

• European central bank
• multivariate GARCH
• Poland
• spillover effects
• unconventional monetary policy

JEL CLASSIFICATION:

• E44
• E52
• F36

Acknowledgments

I would like to thank the participants of the 45th Macromodels conference held in Zakopane in November 2018 for useful discussions. I am also grateful to an anonymous reviewer and the editors for helpful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Krippner’s (2013) estimates of shadow rates for the main central banks are available on the Reserve Bank of New Zealand website, at: https://www.rbnz.govt.nz/research-and-publications/research-programme/additional-research/measures-of-the-stance-of-united-states-monetary-policy/comparison-of-international-monetary-policy-measures.

2. A tractable overview of multivariate GARCH models is provided by Lütkepohl (2005). Tse and Tsui (2002) offer an important alternative to Engle’s (2002) specification of the DCC model, and discuss some issues concerning its estimation.

3. We select the events based on the evaluation of the major decision taken by the ECB after 2008, see Hartmann and Smets (2018).

4. Choice of the appropriate length of an event window may be decisive in capturing fluctuation in the conditional correlation series. If the window is too short, we may not be able to pick up some of the delayed outcomes of the ECB’s policies on variables in the model. If it is too wide, we may miss the transitory effect of events, particularly in the case of mean-reverting processes. Three alternative lengths of the window length are tested in the latter part of the paper.

5. Because the baseline model has 85 estimated parameters, we do not report the mean equation coefficient estimates in the paper. The results are available upon request.

6. Details on those of the alternative specifications of the event study regression and the GARCH-DCC model that are not presented in this section of the paper are available upon request.

7. Weekly data on the EONIA rate and consolidated balance sheet of the Eurosystem come from the ECB Statistical Data Warehouse.

Additional information

Funding

This work was supported by the Faculty of Economics and International Relations at Cracow University of Economics [173/WE-KMA/02/2018/M/8173].