The influence of unconventional monetary policy tools: an euro area perspective
Abstract
Purpose – This article aims to investigate the influence of unconventional monetary policy tools (UMPTs) employed by the European Central Bank (ECB) on the inflation rate and GDP growth rate within the euro area, motivated by the principles of the Taylor rule.
Research methodology – Elastic net regression with ARIMA residuals was used to analyse the relationship between UMPTs and economic indicators, measured by adjusted R-squared. Six samples were constructed, and hypothesis testing was performed using moving block bootstrapping. Residual diagnostics were used for model validation.
Findings – The study revealed significant impacts of UMPTs, particularly in combination with interest rates, on inflation rates. However, adjusted R-square values for GDP growth rate were less pronounced, indicating a more complex relationship. Research contributes to understanding the dynamics of monetary policy transmission mechanisms, informing policy institutions, and guiding future research directions.
Research limitations – Limitations include the focus on the euro area and the absence of analysis in other major economies. Future research should address these limitations and incorporate additional variables for a more comprehensive analysis.
Practical implications – The findings provide insight for policymakers regarding the efficacy of UMPTs in influencing inflation rates, aiding in informed decision-making in monetary policy formulation and implementation.
Originality/Value – This study contributes novelty by comprehensively analysing the relationship between UMPTs and economic indicators within the euro area, providing valuable insight into monetary policy institutions, and guiding future research directions.
Keyword : unconventional monetary policy, European Central Bank, inflation rate, GDP growth rate, elastic net regression
How to Cite
Pečiulis, T., & Vasiliauskaitė, A. (2024). The influence of unconventional monetary policy tools: an euro area perspective. Business, Management and Economics Engineering, 22(2), 317–332. https://doi.org/10.3846/bmee.2024.21191
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Ambler, S., & Rumler, F. (2019). The effectiveness of unconventional monetary policy announcements in the euro area: An event and econometric study. Journal of International Money and Finance, 94, 48–61. https://doi.org/10.1016/j.jimonfin.2019.02.007
Belongia, M. T., & Ireland, P. N. (2014). The Barnett critique after three decades: A new Keynesian analysis. Journal of Econometrics, 183(1), 5–21. https://doi.org/10.1016/j.jeconom.2014.06.006
Bottone, M., & Rosolia, A. (2019). Monetary policy, firms’ inflation expectations and prices: Causal evidence from firm-level data (Working Paper No. 1218). Bank of Italy. https://doi.org/10.2139/ssrn.3432447
Calhoun, G. (2018). Block bootstrap consistency under weak assumptions. Econometric Theory, 34(6), 1383–1406. https://doi.org/10.1017/S0266466617000500
Campbell, J. Y., Pflueger, C., & Viceira, L. M. (2020). Macroeconomic drivers of bond and equity risks. Journal of Political Economy, 128(8), 3148–3185. https://doi.org/10.1086/707766
Clarida, R., Galí, J., & Gertler, M. (1999). The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature, 37(4), 1661–1707. https://doi.org/10.1257/jel.37.4.1661
Conti, A. M., Neri, S., & Nobili, A. (2017). Low inflation and monetary policy in the Euro area (Working Paper No. 2005). European Central Bank. https://doi.org/10.2139/ssrn.2910938
de Haan, J., Mavromatis, K., & Tan, G. (2020). Individual inflation forecasts and monetary policy announcements. Economics Letters, 197, Article 109602. https://doi.org/10.1016/j.econlet.2020.109602
Eberly, J. C., Stock, J. H., & Wright, J. H. (2019). The federal reserve’s current framework for monetary policy: A review and assessment (Working Paper No. 26002). National Bureau of Economic Research. https://doi.org/10.3386/w26002
ECB Data Portal. (n.d.). Retrieved February 5, 2024, from https://data.ecb.europa.eu/
European Central Bank. (2010). Euro area money growth and the “Securities Markets Programme”. ECB Monthly Bulletin, 24–26. https://www.ecb.europa.eu/pub/pdf/other/mb201006_focus01.en.pdf
European Central Bank. (2011). ECB announces measures to support bank lending and money market activity. https://www.ecb.europa.eu/press/pr/date/2011/html/pr111208_1.en.html
European Central Bank. (2012). Technical features of outright monetary transactions. https://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html
European Central Bank. (2014a). ECB announces monetary policy measures to enhance the functioning of the monetary policy transmission mechanism. https://www.ecb.europa.eu/press/pr/date/2014/html/pr140605_2.en.html
European Central Bank. (2014b). Monetary policy decisions. https://www.ecb.europa.eu/press/pr/date/2014/html/pr140605.en.html
European Central Bank. (2015). ECB announces expanded asset purchase programme. https://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html
European Central Bank. (2020). ECB announces €750 billion pandemic emergency purchase programme (PEPP). https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200318_1~3949d6f266.en.html
European Central Bank. (2021). Unconventional fiscal and monetary policy at the zero lower bound [Speech]. https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210226~ff6ad267d4.en.html
Febrero, E., Uxó, J., & Dejuán, Ó. (2015). The ECB during the financial crisis. Not so unconventional! Metroeconomica, 66(4), 715–739. https://doi.org/10.1111/meca.12088
Fedorova, E., & Meshkova, E. (2021). Monetary policy and market interest rates: Literature review using text analysis. International Journal of Development Issues, 20(3), 358–373. https://doi.org/10.1108/IJDI-02-2021-0049
Finnegan, M., & Kapoor, S. (2023). ECB unconventional monetary policy and SME access to finance. Small Business Economics, 61, 1253–1288. https://doi.org/10.1007/s11187-023-00730-0
Galí, J. (2020, November 11–12). The decline in r* and the ECB strategy. In Proceedings of Conference ECB Forum on Central Banking (pp. 151–155). European Central Bank. https://www.ecb.europa.eu/pub/pdf/sintra/ecb.ecbforumoncentralbanking202011~5078c37a89.mt.pdf#page=152
Geissdoerfer, M., Savaget, P., Bocken, N. M. P., & Hultink, E. J. (2017). The circular economy – A new sustainability paradigm? Journal of Cleaner Production, 143, 757–768. https://doi.org/10.1016/j.jclepro.2016.12.048
Gimenez-Nadal, J. I., Lafuente, M., Molina, J. A., & Velilla, J. (2019). Resampling and bootstrap algorithms to assess the relevance of variables: Applications to cross-section entrepreneurship data. Empirical Economics, 56(1), 233–267. https://doi.org/10.1007/s00181-017-1355-x
Hartwell, C. A. (2019). Complexity, uncertainty, and monetary policy: Can the ECB avoid the unconventional becoming the ‘new normal’? The Economists’ Voice, 16(1). https://doi.org/10.1515/ev-2019-0021
Horel, E., & Giesecke, K. (2020). Significance tests for neural networks. Journal of Machine Learning Research, 21.
Horvath, R., & Voslarova, K. (2017). International spillovers of ECB’s unconventional monetary policy: The effect on Central Europe. Applied Economics, 49(24), 2352–2364. https://doi.org/10.1080/00036846.2016.1237764
Houcine, B., Abdelkader, A., & Lachi, O. (2020). The impact of unconventional monetary policy tools on inflation rates in the USA. Asian Economic and Financial Review, 10(6), 628–643. https://doi.org/10.18488/journal.aefr.2020.106.628.643
Johnson, G., Kozicki, S., Priftis, R., Suchanek, L., Witmer, J., & Yang, J. (2020). Implementation and effectiveness of extended monetary policy tools: Lessons from the literature (Staff Discussion Paper No. 2020-16). Bank of Canada, Ottawa.
Kryvtsov, O., & Petersen, L. (2021). Central bank communication that works: Lessons from lab experiments. Journal of Monetary Economics, 117, 760–780. https://doi.org/10.1016/j.jmoneco.2020.05.001
Kuffner, T. A., Lee, S. M. S., & Young, G. A. (2021). Block bootstrap optimality and empirical block selection for sample quantiles with dependent data. Biometrika, 108(3), 675–692. https://doi.org/10.1093/biomet/asaa075
Lockhart, R., Taylor, J., Tibshirani, R. J., & Tibshirani, R. (2014). A significance test for the lasso. Annals of Statistics, 42(2), 413–468. https://doi.org/10.1214/13-AOS1175
Lomachynska, I., Maslennikov, Y., & Yakubovska, M. (2020, October 6–9). Infocommunication tools of unconventional monetary policy. In Proceedings of the 2020 IEEE International Conference on Problems of Infocommunications. Science and Technology (PIC S & T) (pp. 737–740). Kharkiv, Ukraine. IEEE. https://doi.org/10.1109/PICST51311.2020.9467922
Mahmud, A., & Akuoko-Konadu, E. (2023). Has policy rate been an effective tool in taming inflation? A Sub-Saharan African perspective. Forum Scientiae Oeconomia, 11(1), 166–176. https://ojs.wsb.edu.pl/index.php/fso/article/view/652/671
Malmendier, U., Nagel, S., & Yan, Z. (2021). The making of hawks and doves. Journal of Monetary Economics, 117, 19–42. https://doi.org/10.1016/j.jmoneco.2020.04.002
Mitchell, K., & Pearce, D. K. (2020). How did unconventional monetary policy affect economic forecasts? Contemporary Economic Policy, 38(1), 206–220. https://doi.org/10.1111/coep.12440
Mouabbi, S., & Sahuc, J.-G. (2019). Evaluating the macroeconomic effects of the ECB’s unconventional monetary policies (Working Paper No. 708). Banque de France. https://doi.org/10.2139/ssrn.3338541
Mulligan, R. F. (2021). Monetary policy since the great recession. American Institute for Economic Research. https://www.aier.org/article/monetary-policy-since-the-great-recession/
Ouerk, S., Boucher, C., & Lubochinsky, C. (2020). Unconventional monetary policy in the Euro Area: Shadow rate and light effects. Journal of Macroeconomics, 65, Article 103219. https://doi.org/10.1016/j.jmacro.2020.103219
Petropoulos, F., Grushka-Cockayne, Y., Siemsen, E., & Spiliotis, E. (2022). Wielding Occam’s razor: Fast and frugal retail forecasting. SSRN. https://doi.org/10.2139/ssrn.3792565
Ravn, M. O., & Sterk, V. (2021). Macroeconomic fluctuations with HANK & SAM: An analytical approach. Journal of the European Economic Association, 19(2), 1162–1202. https://doi.org/10.1093/jeea/jvaa028
Saiti, D., Gockov, G., & Trenovski, B. (2021). How monetary policy affects the lending and economic activity in a banking system with excess liquidity. Economics and Culture, 18(2), 51–60. https://doi.org/10.2478/jec-2021-0014
Tabassum, M. N., & Ollila, E. (2017, August 28–2 September). Pathwise least angle regression and a significance test for the elastic net. In Proceedings of the 2017 25th European Signal Processing Confrence (EUSIPCO) (pp. 1309–1313). Kos, Greece. IEEE. https://doi.org/10.23919/EUSIPCO.2017.8081420
Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195–214. https://doi.org/10.1016/0167-2231(93)90009-L
Trifonova, S. (2022). The ECB’s unconventional monetary policy measures during the coronavirus crisis. Global Business & Economics Anthology, 1, 1–17. https://doi.org/10.47341/GBEA.22031
Woodford, M., & Walsh, C. E. (2005). Interest and prices: Foundations of a theory of monetary policy. Macroeconomic Dynamics, 9(3), 462–468. https://doi.org/10.1017/S1365100505040253
Zabala, J. A., & Prats, M. A. (2020). The unconventional monetary policy of the European Central Bank: Effectiveness and transmission analysis. The World Economy, 43(3), 794–809. https://doi.org/10.1111/twec.12880
Zou, H., & Hastie, T. (2005). Regularization and variable selection via the elastic net. Journal of the Royal Statistical Society: Series B (Statistical Methodology), 67(2), 301–320. https://doi.org/10.1111/j.1467-9868.2005.00503.x
Belongia, M. T., & Ireland, P. N. (2014). The Barnett critique after three decades: A new Keynesian analysis. Journal of Econometrics, 183(1), 5–21. https://doi.org/10.1016/j.jeconom.2014.06.006
Bottone, M., & Rosolia, A. (2019). Monetary policy, firms’ inflation expectations and prices: Causal evidence from firm-level data (Working Paper No. 1218). Bank of Italy. https://doi.org/10.2139/ssrn.3432447
Calhoun, G. (2018). Block bootstrap consistency under weak assumptions. Econometric Theory, 34(6), 1383–1406. https://doi.org/10.1017/S0266466617000500
Campbell, J. Y., Pflueger, C., & Viceira, L. M. (2020). Macroeconomic drivers of bond and equity risks. Journal of Political Economy, 128(8), 3148–3185. https://doi.org/10.1086/707766
Clarida, R., Galí, J., & Gertler, M. (1999). The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature, 37(4), 1661–1707. https://doi.org/10.1257/jel.37.4.1661
Conti, A. M., Neri, S., & Nobili, A. (2017). Low inflation and monetary policy in the Euro area (Working Paper No. 2005). European Central Bank. https://doi.org/10.2139/ssrn.2910938
de Haan, J., Mavromatis, K., & Tan, G. (2020). Individual inflation forecasts and monetary policy announcements. Economics Letters, 197, Article 109602. https://doi.org/10.1016/j.econlet.2020.109602
Eberly, J. C., Stock, J. H., & Wright, J. H. (2019). The federal reserve’s current framework for monetary policy: A review and assessment (Working Paper No. 26002). National Bureau of Economic Research. https://doi.org/10.3386/w26002
ECB Data Portal. (n.d.). Retrieved February 5, 2024, from https://data.ecb.europa.eu/
European Central Bank. (2010). Euro area money growth and the “Securities Markets Programme”. ECB Monthly Bulletin, 24–26. https://www.ecb.europa.eu/pub/pdf/other/mb201006_focus01.en.pdf
European Central Bank. (2011). ECB announces measures to support bank lending and money market activity. https://www.ecb.europa.eu/press/pr/date/2011/html/pr111208_1.en.html
European Central Bank. (2012). Technical features of outright monetary transactions. https://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html
European Central Bank. (2014a). ECB announces monetary policy measures to enhance the functioning of the monetary policy transmission mechanism. https://www.ecb.europa.eu/press/pr/date/2014/html/pr140605_2.en.html
European Central Bank. (2014b). Monetary policy decisions. https://www.ecb.europa.eu/press/pr/date/2014/html/pr140605.en.html
European Central Bank. (2015). ECB announces expanded asset purchase programme. https://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html
European Central Bank. (2020). ECB announces €750 billion pandemic emergency purchase programme (PEPP). https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200318_1~3949d6f266.en.html
European Central Bank. (2021). Unconventional fiscal and monetary policy at the zero lower bound [Speech]. https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210226~ff6ad267d4.en.html
Febrero, E., Uxó, J., & Dejuán, Ó. (2015). The ECB during the financial crisis. Not so unconventional! Metroeconomica, 66(4), 715–739. https://doi.org/10.1111/meca.12088
Fedorova, E., & Meshkova, E. (2021). Monetary policy and market interest rates: Literature review using text analysis. International Journal of Development Issues, 20(3), 358–373. https://doi.org/10.1108/IJDI-02-2021-0049
Finnegan, M., & Kapoor, S. (2023). ECB unconventional monetary policy and SME access to finance. Small Business Economics, 61, 1253–1288. https://doi.org/10.1007/s11187-023-00730-0
Galí, J. (2020, November 11–12). The decline in r* and the ECB strategy. In Proceedings of Conference ECB Forum on Central Banking (pp. 151–155). European Central Bank. https://www.ecb.europa.eu/pub/pdf/sintra/ecb.ecbforumoncentralbanking202011~5078c37a89.mt.pdf#page=152
Geissdoerfer, M., Savaget, P., Bocken, N. M. P., & Hultink, E. J. (2017). The circular economy – A new sustainability paradigm? Journal of Cleaner Production, 143, 757–768. https://doi.org/10.1016/j.jclepro.2016.12.048
Gimenez-Nadal, J. I., Lafuente, M., Molina, J. A., & Velilla, J. (2019). Resampling and bootstrap algorithms to assess the relevance of variables: Applications to cross-section entrepreneurship data. Empirical Economics, 56(1), 233–267. https://doi.org/10.1007/s00181-017-1355-x
Hartwell, C. A. (2019). Complexity, uncertainty, and monetary policy: Can the ECB avoid the unconventional becoming the ‘new normal’? The Economists’ Voice, 16(1). https://doi.org/10.1515/ev-2019-0021
Horel, E., & Giesecke, K. (2020). Significance tests for neural networks. Journal of Machine Learning Research, 21.
Horvath, R., & Voslarova, K. (2017). International spillovers of ECB’s unconventional monetary policy: The effect on Central Europe. Applied Economics, 49(24), 2352–2364. https://doi.org/10.1080/00036846.2016.1237764
Houcine, B., Abdelkader, A., & Lachi, O. (2020). The impact of unconventional monetary policy tools on inflation rates in the USA. Asian Economic and Financial Review, 10(6), 628–643. https://doi.org/10.18488/journal.aefr.2020.106.628.643
Johnson, G., Kozicki, S., Priftis, R., Suchanek, L., Witmer, J., & Yang, J. (2020). Implementation and effectiveness of extended monetary policy tools: Lessons from the literature (Staff Discussion Paper No. 2020-16). Bank of Canada, Ottawa.
Kryvtsov, O., & Petersen, L. (2021). Central bank communication that works: Lessons from lab experiments. Journal of Monetary Economics, 117, 760–780. https://doi.org/10.1016/j.jmoneco.2020.05.001
Kuffner, T. A., Lee, S. M. S., & Young, G. A. (2021). Block bootstrap optimality and empirical block selection for sample quantiles with dependent data. Biometrika, 108(3), 675–692. https://doi.org/10.1093/biomet/asaa075
Lockhart, R., Taylor, J., Tibshirani, R. J., & Tibshirani, R. (2014). A significance test for the lasso. Annals of Statistics, 42(2), 413–468. https://doi.org/10.1214/13-AOS1175
Lomachynska, I., Maslennikov, Y., & Yakubovska, M. (2020, October 6–9). Infocommunication tools of unconventional monetary policy. In Proceedings of the 2020 IEEE International Conference on Problems of Infocommunications. Science and Technology (PIC S & T) (pp. 737–740). Kharkiv, Ukraine. IEEE. https://doi.org/10.1109/PICST51311.2020.9467922
Mahmud, A., & Akuoko-Konadu, E. (2023). Has policy rate been an effective tool in taming inflation? A Sub-Saharan African perspective. Forum Scientiae Oeconomia, 11(1), 166–176. https://ojs.wsb.edu.pl/index.php/fso/article/view/652/671
Malmendier, U., Nagel, S., & Yan, Z. (2021). The making of hawks and doves. Journal of Monetary Economics, 117, 19–42. https://doi.org/10.1016/j.jmoneco.2020.04.002
Mitchell, K., & Pearce, D. K. (2020). How did unconventional monetary policy affect economic forecasts? Contemporary Economic Policy, 38(1), 206–220. https://doi.org/10.1111/coep.12440
Mouabbi, S., & Sahuc, J.-G. (2019). Evaluating the macroeconomic effects of the ECB’s unconventional monetary policies (Working Paper No. 708). Banque de France. https://doi.org/10.2139/ssrn.3338541
Mulligan, R. F. (2021). Monetary policy since the great recession. American Institute for Economic Research. https://www.aier.org/article/monetary-policy-since-the-great-recession/
Ouerk, S., Boucher, C., & Lubochinsky, C. (2020). Unconventional monetary policy in the Euro Area: Shadow rate and light effects. Journal of Macroeconomics, 65, Article 103219. https://doi.org/10.1016/j.jmacro.2020.103219
Petropoulos, F., Grushka-Cockayne, Y., Siemsen, E., & Spiliotis, E. (2022). Wielding Occam’s razor: Fast and frugal retail forecasting. SSRN. https://doi.org/10.2139/ssrn.3792565
Ravn, M. O., & Sterk, V. (2021). Macroeconomic fluctuations with HANK & SAM: An analytical approach. Journal of the European Economic Association, 19(2), 1162–1202. https://doi.org/10.1093/jeea/jvaa028
Saiti, D., Gockov, G., & Trenovski, B. (2021). How monetary policy affects the lending and economic activity in a banking system with excess liquidity. Economics and Culture, 18(2), 51–60. https://doi.org/10.2478/jec-2021-0014
Tabassum, M. N., & Ollila, E. (2017, August 28–2 September). Pathwise least angle regression and a significance test for the elastic net. In Proceedings of the 2017 25th European Signal Processing Confrence (EUSIPCO) (pp. 1309–1313). Kos, Greece. IEEE. https://doi.org/10.23919/EUSIPCO.2017.8081420
Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195–214. https://doi.org/10.1016/0167-2231(93)90009-L
Trifonova, S. (2022). The ECB’s unconventional monetary policy measures during the coronavirus crisis. Global Business & Economics Anthology, 1, 1–17. https://doi.org/10.47341/GBEA.22031
Woodford, M., & Walsh, C. E. (2005). Interest and prices: Foundations of a theory of monetary policy. Macroeconomic Dynamics, 9(3), 462–468. https://doi.org/10.1017/S1365100505040253
Zabala, J. A., & Prats, M. A. (2020). The unconventional monetary policy of the European Central Bank: Effectiveness and transmission analysis. The World Economy, 43(3), 794–809. https://doi.org/10.1111/twec.12880
Zou, H., & Hastie, T. (2005). Regularization and variable selection via the elastic net. Journal of the Royal Statistical Society: Series B (Statistical Methodology), 67(2), 301–320. https://doi.org/10.1111/j.1467-9868.2005.00503.x