A SVAR analysis with an event study
Abstract:
This paper examines the effects of an expansionary shock to the European Central Bank’s balance sheet before and during the Covid-19 pandemic starting March 2020. When the ECB buys assets, their balance sheet will increase, which is known as unconventional monetary policy or quantitative easing. We model the effects from the ECB purchasing assets by structural vector autoregressive models with an exogenous variable. We follow the empirical approaches of Uhlig (2005) and Boeckx et al. (2017) to study the effects by imposing sign restrictions on some of the impulse responses. We find quantitative easing from the ECB reduced stress in the financial markets at the cost of inflation. Furthermore, we estimate no statistical significant effect on GDP from asset purchasing. Our analysis imply that the ECB can stabilize the financial markets through policy even during extraordinary events.
Purchasing assets such as bonds increase the price and decrease the yields of the bonds. As agents are considered forward looking, there will also be an effect from the ECB’s quantitative easing announcements before the bonds are actually purchased. Therefore, we make an event study to examine the effects of quantitative easing on daily government bond yields in the euro area. We find a positive impact on bond yields from quantitative easing announcements like Jensen et al. (2017) but contrary to Krishnamurthy and VissingJorgensen (2011). Our results could be explained by the ECB’s announcements being of smaller scale than expected by the markets, which could result in higher yields on the bonds.