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The impact of unconventional monetary policy in the euro area. Structural and scenario analysis from a Bayesian VAR
Author(s) -
Evgenidis Anastasios,
Papadamou Stephanos
Publication year - 2021
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.2088
Subject(s) - economics , monetary policy , monetary economics , inflation (cosmology) , counterfactual thinking , dynamic stochastic general equilibrium , bayesian vector autoregression , inflation targeting , exchange rate , policy mix , asset (computer security) , interest rate , taylor rule , mandate , macroeconomics , financial accelerator , interest rate channel , bayesian probability , central bank , credit channel , philosophy , physics , computer security , epistemology , artificial intelligence , theoretical physics , computer science , law , political science
This paper employs a medium scale Bayesian VAR model to provide a rich picture of the transmission of unconventional monetary policy (UMP) shocks in various dimensions of the economy, and to shed light on the appropriate policy mix that the central bank could adopt to fulfil its price stability mandate. We show that UMP shocks have a significant positive impact on both economic activity and inflation; stem financial market stress episodes and boost economic sentiment. Additionally, several channels seem to have been activated, including the exchange rate, inflation expectations and the bank lending channel. Counterfactual policy analysis suggests that a policy mix that combines the use of permanently negative interest rates with a balance sheet expansion at a steady pace over a long period, could bring inflation closer to the target. Alternative policy scenarios that, either give more weight on the purchases during the first months or, terminate asset purchases too early, would fail to keep inflation on track to meet its target.