Impacts of the ECB unconventional monetary policies on government bond yelds from 2013 to 2017

Abstract

The purpose of this thesis is to examine the unconventional monetary policies introduced by the European Central Bank (ECB) after the 2008 financial crisis and to study their impact on interest rates in the euro area. First, we present the conventional and unconventional monetary policies undertaken by the ECB and their transmission channels. The rest of this thesis is dedicated to analyzing the impact of the unconventional monetary policies on interest rates in Europe and two transmission channels through which they operate: the signaling channel and the portfolio-rebalance channel. To do so, we use an event-study methodology focusing on the immediate changes in euro area government bond (EAGB) yields over a 2-day interval around the ECB’s announcements in order to capture the market’s direct reaction to the news released. We then take the cumulative changes over all the relevant events as a measure of the overall effects of the announcements on interest rates. Our results suggest that unconventional monetary policies decline EAGB yields at all maturities and on average by about 41 basis points. The decomposition of interest rate responses shows that market expectation about future short rates, as proxied by the IRS rates, rises across all maturities, while term premiums, as reflected by the spreads between EAGB yields and their corresponding IRS rates, fall at all maturities. It appears that ECB’s unconventional monetary policies are useful in reducing the term premium of interest rates through the portfolio rebalance channel, but the fall in term premium is largely offset by the rise in market expectation about future short rates. Therefore, the portfolio rebalance channel is dominant in the programs conducted by the ECB, while the signaling channel seems to be less obvious.