Combining Negative Rates, Forward Guidance and Asset Purchases: Identification and Impacts of the ECB's Unconventional Policies

64 Pages Posted: 3 Jun 2021

See all articles by Massimo Rostagno

Massimo Rostagno

European Central Bank (ECB)

Carlo Altavilla

European Central Bank (ECB)

Giacomo Carboni

European Central Bank (ECB)

Wolfgang Lemke

European Central Bank

Roberto Motto

European Central Bank (ECB)

Arthur Saint Guilhem

European Central Bank (ECB)

Date Written: June 1, 2021

Abstract

This paper provides new empirical evidence that bears on the efficacy of unconventional monetary policies when the main policy rate is negative. When a negative interest rate policy (NIRP) is deployed in concert with rate forward guidance (FG) and quantitative easing (QE), the identification of the impacts of these unconventional instruments of monetary policy is challenging. We propose a novel identification approach that seeks to overcome this challenge by combining a dense, controlled event study with forward curve counterfactuals that we construct using predictive rate densities derived from rate options. We find that NIRP has exerted a sizeable influence on the term structure of interest rates throughout maturities while, on net, the impact of rate FG has been more muted. QE explains the lion’s share of yield effects, particularly over the back end of the yield curve. We then feed these rate counterfactuals into a large-scale Bayesian VAR and generate alternative histories for the euro area macro-economy that one would likely have observed between 2013 and 2020 in no-NIRP (with or without FG) and in no-QE regimes. According to this conditional forecasting exercise, in 2019 GDP growth and annual inflation would have been 1.1 p.p. and 0.75 p.p. lower, respectively, and the unemployment rate 1.1 p.p. higher than they actually were, had the ECB abstained from using NIRP, FG and QE over the previous six years or so.

JEL Classification: C32, C54, C58, E50, E51, E52

Suggested Citation

Rostagno, Massimo and Altavilla, Carlo and Carboni, Giacomo and Lemke, Wolfgang and Motto, Roberto and Guilhem, Arthur Saint, Combining Negative Rates, Forward Guidance and Asset Purchases: Identification and Impacts of the ECB's Unconventional Policies (June 1, 2021). ECB Working Paper No. 2021/2564, Available at SSRN: https://ssrn.com/abstract=3858300

Massimo Rostagno (Contact Author)

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
+49 69 1344 7663 (Phone)
+49 69 1344 7604 (Fax)

Carlo Altavilla

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Giacomo Carboni

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Wolfgang Lemke

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Arthur Saint Guilhem

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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