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Macroeconomic effects of the ECB’S forward guidance

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Abstract

This paper evaluates the macroeconomic effects of the European Central Bank’s (ECB) forward guidance (FG) in the euro area and analyses its interaction with asset purchases. To that end, we employ a battery of structural vector autoregressions (VARs) with both constant and time-varying parameters and/or the error covariance matrix to explore the propagation of the FG shock over time and account for the changing nature of the ECB’s FG. The FG shock is identified via traditional sign and zero restrictions of Arias et al. (Econometrica 86(2): 685–720, 2018), narrative sign restrictions of Antolin-Diaz and Rubio-Ramirez (Am Econ Rev 108(10):2802–2829, 2018) and high-frequency information approach akin to Andrade and Ferroni (J Monet Econ, 2020) and Jarocinski and Karadi (Am Econ J Macroecon 12(2):1–43, 2020). We find that the ECB’s forward guidance on interest rates has been an effective policy tool as its announcement causing a 5 bps drop in interest rate expectations increases output by 0.09–0.12% and the price level by 0.035%. In addition, multiple evidence suggests that the introduction of the Asset Purchase Programme (APP) in 2015 considerably enhanced the credibility of FG. Regarding the transmission mechanism, we find that FG significantly lowered uncertainty in the euro area as well as borrowing costs for both households and firms.

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Notes

  1. The BEAR Toolbox has been used for the estimation of the models.

  2. The choice to impose a normal distribution on \(\gamma_{i}\) rather than Beta distribution, which would allow to constrain it between 0 and 1, is motivated by the property of Beta distribution which disallows to obtain conjugacy with other distributions employed to estimate the model.

  3. Impulse response functions from all models are generated from 15 000 Gibbs sampler iterations with the first 10 000 discarded as burn-in.

  4. For the model with constant parameters and stochastic volatility, impulse responses are computed using mean volatility estimated over the whole sample period.

  5. With the exception of the exercise employing narrative sign restrictions.

  6. We set the AR coefficient of the prior to 0, overall tightness \(\lambda_{1} = 0.1\), cross-variable weighting \(\lambda_{2} = 0.5\), lag decay \(\lambda_{3} = 1\) and block exogeneity shrinkage \(\lambda_{5} = 0.001\).

  7. The rest of the variables are ordered as in Table 1.

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Acknowledgements

The author would like to thank participants of an internal seminar held at Latvijas Banka for useful suggestions and Erlands Krongorns (Latvijas Banka) for excellent research assistance. Comments by Boriss Siliverstovs (Latvijas Banka), Lenno Uusküla (Eesti Pank), associate editor and two anonymous reviewers are gratefully acknowledged. The views expressed in this paper are those of the author and do not necessarily reflect the views of Latvijas Banka.

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    Andrejs Zlobins

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Zlobins, A. Macroeconomic effects of the ECB’S forward guidance. Empir Econ 61, 2587–2611 (2021). https://doi.org/10.1007/s00181-020-01981-6

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