Modelling the Effects of Unconventional Monetary Policy in a Heterogeneous Monetary Union

Abstract

This paper focuses on the effects of the ECB’s unconventional monetary policy on the member countries of the euro area. The analysis is based on a Global VAR model, which allows to take into account mutual influences of processes in the countries of the currency union. Identification of unconventional monetary policy shock is conducted using a shadow interest rate which reflects changes in economic agents’ expectations following the announcement of unconventional monetary policy measures. The model is estimated using data for the euro area from 2007 to 2018 and covers all of the key instances of implementation of unconventional measures by the ECB. The results show that expansionary policy leads to a significant rise in output and prices in the euro area. Additionally, the effects of unconventional monetary policy are heterogeneous across countries: the response to unconventional monetary policy shock is insignificant in countries that are strongly affected by the crisis, and the effectiveness of the measures varies across countries with different levels of banking sector capitalisation. It was also found that the efficiency of unconventional monetary policy measures against deflation depends upon spillovers of the interaction between core and periphery countries in the monetary union.