Abstract
Among the non-standard monetary measures used by the European Central Bank (ECB), asset purchase programmes (APPs) have been gaining increasing importance in the last couple of years, accounting for about half of total assets in the Eurosystem’s balance sheet as of late 2016. This chapter aims to gauge the impact of the ECB’s APPs on the financial markets of a set of Central, Eastern and South Eastern European (CESEE) economies. We find that the APPs implementation contributed to supporting cross-border portfolio investment flows to, and foreign bank claims into, CESEE economies mainly in an indirect way—i.e. through their impact on certain liquidity and financial condition indicators in the euro area—therefore revealing the existence of both a portfolio rebalancing and a banking liquidity channel of transmission. Without such non-standard monetary measures, both types of cross-border capital flows would have been weaker and financial conditions in CESEE economies more stringent than they actually were. In fact, we also show that the implementation of the ECB’s APPs had the effect of lowering both policy and long-term interest rates to levels well below those predicted on the basis of similarities in business cycles or global risk factors. These effects may not have been entirely unwelcome during the recent period of sub-par growth and unusually low inflation, but may pose relevant policy challenges going forward, against the background of a cyclical divergence between CESEE countries and the euro area economy.
The authors would like to thank Giuseppe Parigi, Pietro Catte, Valeria Rolli, Giorgio Merlonghi, Emidio Cocozza, Daniela Marconi, Martina Cecioni, Urszula Szczerbowicz and participants of the seminar organised by the Department of Economics at the University of Oxford and of the 14th Emerging Markets Workshop organised by Banco de España. The views expressed here are those of the authors and do not necessarily reflect those of the Bank of Italy. All errors and omissions remain our own.
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Notes
- 1.
Throughout the paper we will refer without distinction to the ECB’s or the Eurosystem’s non-standard tools, though these measures are actually decided and implemented by the Eurosystem as a whole.
- 2.
The CESEE economies analysed here include both non-euro area EU countries—Bulgaria, Croatia, the Czech Republic, Hungary, Poland and Romania—and a number of EU candidates and potential candidates—Albania, Bosnia-Herzegovina, the FYR of Macedonia, Montenegro and Serbia.
- 3.
- 4.
In the extant literature there is a very long series of transmission channels. To name but a few examples: Krishnamurthy and Vissing-Jorgensen (2011) proposed a duration risk channel, a safety channel, a prepayment risk premium channel, a default risk channel and an inflation channel; Fratzscher et al. (2014) added a risk aversion channel, a bank credit risk channel and a sovereign credit risk channel; Cova and Ferrero (2015) an asset pricing channel and a government budget constraint channel.
- 5.
The CBPP1 ended, as planned, on 30 June 2010 when it reached the originally announced target of €60 billion in nominal terms. The CBPP2 terminated on 31 October 2012 when it reached a nominal amount of €16.4 billion, below the original targeted amount of €40 billion. The CBPP3, on the contrary, was not launched with a pre-established targeted nominal amount; as a matter of fact, as of end-2016, it reached €203.5 billion.
- 6.
SMP purchases were made in two big waves, one in the first half of 2010 and the other in the second half of 2011, with their liquidity impact sterilized through specific operations. The purchases were conducted on a discretionary basis, according to daily market conditions. Following the ECB Governing Council decision of 6 September 2012 to initiate outright monetary transactions, the SMP was terminated.
- 7.
The programmes signed for Bosnia-Herzegovina, Hungary and Romania, were approved in the immediate aftermath of the global crisis, and took the form of large and front-loaded support packages designed to avoid crippling recessions. An arrangement with Serbia was first treated as precautionary but was quickly augmented and drawn upon. In 2009, Poland qualified for the newly-introduced Flexible Credit Line, a precautionary arrangement with no requirement to take additional measures, underscoring its very sound economic fundamentals and policy frameworks. Additionally, FYR of Macedonia adopted a Precautionary and liquidity line (which it later drew upon), an arrangement that recognized its sound fundamentals with focused and limited conditionality.
- 8.
The EU offers balance of payments assistance to member countries outside the euro area that are experiencing, or threatened by, difficulties in financing external imbalances. This kind of financial assistance takes the form of medium-term loans, which are conditional on the implementation of policies designed to address underlying macroeconomic imbalances. Typically, balance of payments assistance from the EU is offered in cooperation with the IMF and other international financial institutions.
- 9.
The European Bank Coordination ‘Vienna’ Initiative is a framework for safeguarding the financial stability of emerging Europe. The Initiative was launched at the height of the first wave of the global financial crisis in January 2009. It brought together all the relevant public and private sector stakeholders of EU-based cross-border banks, which own much of the banking sectors in that region and also hold a significant portion of government securities. It was reactivated in late 2011, when signs of a severe credit crunch within the eurozone, and of rapid deleveraging in emerging Europe, resurfaced.
- 10.
- 11.
The dummy indicator includes the 18 positive occurrences recorded from January 2009 to March 2016 and is contained in Table 6 in Appendix 1.
- 12.
- 13.
The average term spread is calculated as the difference between 10-year yields of AAA euro area government bonds and the 3-month Euribor rate.
- 14.
The average spread between Italian and Spanish long-term yields and the German Bund is intended to capture those phases in which the ‘redenomination’ risk related to the break-up of the euro area and the ensuing fragmentation of its financial system became particularly acute. As documented in Albertazzi et al. (2012), Neri (2013) and Zoli (2013), in fact, at the height of the euro area sovereign debt crisis adverse movements in the Italian and other peripheral euro area countries sovereign spreads were unfavourably transmitted to bank funding costs, lending conditions and the availability of credit for the real economy. Against the background of the strong banking linkages between the euro area and CESEE economies—Italian, Austrian and, to a lesser extent, French banking groups are dominant players in these countries’ banking sectors—we believe that this variable would be able to capture quite well the transmission of the shock stemming from the outbreak of the euro area’s sovereign debt crisis to CESEE economies.
- 15.
See Ciarlone and Colabella (2016) for greater details.
- 16.
To explore the sensitivity of our results, we conducted an extensive series of robustness checks. To begin with, we replicated the event study analysis using two-day and one-week windows instead of the one-day reported before. For both the models relative to the portfolio rebalancing and banking liquidity channels, we experimented with different indicators of liquidity and financing conditions, substituting the growth rate of credit to the private sector with the M2 growth rate and the average term spread with the 10-year yields on euro area AAA rated government bonds. For the portfolio rebalancing channel, we also investigated the robustness of our results for the bond rather than the stock compartments. Overall, the results turned out to be broadly consistent with those reported in the main tables and confirm the role played by the ECB’s APPs.
- 17.
In a zero lower bound environment, a number of researchers have started designing shadow rate models to characterize the term structure of interest rates or quantify the stance of monetary policy. The Wu and Xia (2016) shadow rate builds on an options model for interest rates to find implied values of segments of the term structure. In short, the shadow rate is assumed to be a linear function of three latent variables called factors, which follow a VAR (1) process; the latent factors and the shadow rate are estimated with an extended Kalman filter.
- 18.
As a robustness test, we replicated the same set of estimates by recurring to panel feasible generalized least squares, as in Grey (2013). The results, not reported here for the sake of brevity but available from the authors upon request, are in line with those reported in the main text.
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Appendices
Appendix 1: The ECB’s Asset Purchase Programmes
Appendix 2: The ECB’s Asset Purchase Programmes
Timeline of the ECB’s asset purchase programmes (weekly data, billions of euros). Note the figure shows the amounts of financial assets purchased on a weekly basis by the ECB since autumn 2009 under the different programmes, as well as the cumulated stock held for monetary policy purposes. Source: European Central Bank
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Ciarlone, A., Colabella, A. (2018). International Spillovers of Non-standard Monetary Policy: Evidence From Central and Eastern Europe. In: Ferrara, L., Hernando, I., Marconi, D. (eds) International Macroeconomics in the Wake of the Global Financial Crisis. Financial and Monetary Policy Studies, vol 46. Springer, Cham. https://doi.org/10.1007/978-3-319-79075-6_14
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