Document De Recherche Du Laboratoire D'économie D'orléans
Total Page：16
File Type：pdf, Size：1020Kb
Document de Recherche du Laboratoire d’Éco n omie d’Orléans Working Paper Series, Economic Research Department of the University of Orléans (LEO), France DR LEO 20 2 1 - 1 3 - Do Centra l and Eastern European Countries benefit from ECB's unconventional monetary policies? A G - VAR approach Nicolae - Bogdan I ANC Adrian - Marius I O N E S C U M i s e e n l i g n e / O n l i n e : 1 6 / 0 8 / 2 0 2 1 Mise en li gne / Onl ine : 16 / 0 8 / 2 021 Laboratoire d’Économie d’Orléans Collegium DEG Rue de Blois - BP 26739 45067 Orléans Cedex 2 Tél. : (33) (0)2 38 41 70 37 e - mail : leo@univ - orleans.fr www.leo - univ - orleans.fr/ Do Central and Eastern European Countries benefit from ECB's unconventional monetary policies? A G-VAR approach Nicolae-Bogdan Ianc1 Adrian-Marius Ionescu2 Abstract Zero lower bound remained for several years since the economic crisis of 2008, as well as a stagnating economic recovery and an ultra-low (even negative in 2014) inflation rate called for stronger monetary arms. The European Central Bank adopted unconventional monetary policies gradually. The Euro sphere profits from these policies, but do Central and Eastern European Countries (CEECs) benefit from cheap money as well? We use monthly data from the time period of 2008-2015 to investigate, using a GVAR model, the impact of ECB's unconventional monetary policies on six CEE candidates’ countries to the Eurozone. We examine the spillover effects of both the balance sheet extension of the ECB and the long-term refinancing operations (LTRO) on liquidity- and yield spread. The results show that on the one hand, the liquidity spread decreases in CEECs with both the ECB's balance-sheet extension and LTRO programs, mostly in Romania, due to a decrease in the interest rates. On the other hand, the yield spread is increasing to LTRO shocks in CEECs, mainly in Bulgaria, Czech Republic, and Romania. Keywords: CEECs, ECB, GVAR, unconventional monetary policy, balance sheet, LTRO, liquidity spread, yield spread JEL classification : E43, E52, E58. 1 LEO, University of Orléans and ECREB, West University of Timisoara 2 Everience 1 1.Introduction In the wake of the crisis, interest rates reached zero lower bound for the main central banks in the world. The effectiveness of conventional monetary policy (i.e., the interest rate channel) was exhausted, and the economy was not recovered. Federal Reserve Bank (Fed), Bank of Japan, Bank of England, and European Central Bank (ECB) adopted unconventional monetary policies, which means that central banks continue to provide liquidity, but differently than once before. This policy, together with the fiscal stimulus launched by European governments, was designed to dent the demand first and to restore the economic growth consequently, which was harmfully affected by the crisis. We can distinguish three phases for the ECB's unconventional monetary policies. First, ECB starts to reinforce the banking system in 2008 using last resort lending operations, called Long- Term Refinancing Operations (LTRO), with three to six- or twelve-month maturities. Its characteristics were a fixed value for the interest rates for the whole maturity period and an excess amount of money for the banks' disposals. Second, after the rise of the sovereign public debt in several Eurozone members, ECB enforced a purchasing of their government bonds between 2010-2012. The new ECB's mission was called Security Market Program (SMP), but it was replaced by a more effective program, namely Outright Monetary Transactions (OMT). Third, when the economy started to revert slowly, the inflation rate was declining lower and lower, even surpassing negative inflation spheres. The progressively increasing deflation was not welcomed, therefore resulting in the ECB pushing to the acceleration to fight against it by launching the quantitative easing (QE) program. It was the moment when the ECB governor Mario Draghi announced in a press conference taking place on the 22nd of January 2015 that the central bank will begin a quantitative easing program (Draghi (2015)). A total amount of € 1,1 billion was to be infused, and it included both public and private debt purchases. The transmission channels are forward guidance, balance sheet extension, interest rate alignment and international credits. The motivation of this paper is the belief of a necessity of new arms adoption by the ECB. The persistence of zero lower bound since 2008, the stagnating economic growth since 2012 and the ultra-low (even negative) inflation rate in 2014 called for stronger monetary strategies. ECB adopted them gradually, and the Eurozone benefits from their employment quickly (Gambacorta et al., 2014, Cova et al., 2015 and Dell'Ariccia et al., 2018). But a controversial issue arises, namely do the ECB's unconventional monetary policies impact beyond the Eurozone? The latter is not yet using the common currency, so the monetary policy here is conducted by the individual central banks, which are members of the European System of Central Banks (ESCB). The objective of this paper is to count the ECB's unconventional monetary policies spillovers effects on non-Eurozone members, called CEECs. The countries, as mentioned beforehand, are to adopt the common currency in the future, so the convergence process instructs them to harmonize their policies with the Eurozone. A moderate public debt-to-GDP 2 ratio characterizes these countries, so no need for SMP or any ECB direct or indirect assistance is necessary. Moreover, the European Commission Convergence Report (2020) displays that there are no countries to fulfil all the economic convergence criteria, except for Croatia. However, we investigate the impact of the instruments employed by ECB over the liquidity- and yield spread. The instruments used are the balance sheet extension and long-term refinancing operations (LTRO). ECB has more than doubled its purchases since 2015 (Draghi (2019)), in which forward guidance was the subject of several works about asset purchases (Borio et al., 2017). Our main objective is to deepen the understanding of the ECB's policies effects on the non-Eurozone area. LTRO were the first unconventional measures experienced by the ECB, which thereby become strengthened in times of inflation. What are our contributions? First, we employ a Global Vector Autoregressive (GVAR, following Pesaran et al., (2004) and Dees et al., 2007) for measuring the impact of the ECB's instruments on the CEECs. Apart from a standard VAR, GVAR gives the possibility to connect each country-model with foreign variables in order to account for the exogen effects of a local economy. For example, how the ECB's policy, like an independent variable, affects a local CEE economy? According to Dees et al., 2007, the essential feature coming from the business cycle in a cross-country analysis, like ours, is that patterns exist which include the consideration of co-movement for macroeconomic variables. They show the existence of co-movement for inflation, output, interest rates and real equities. Moreover, several works concerning the effects of ECB's unconventional monetary policy apply to the Euro area (Burriel and Galesi, 2018), the Scandinavian countries (Ter Ellen et al., (2020)) or the European Union (EU) members but not Eurozone candidates (Kucharčuková et al., 2016). Unlike the existing literature, we focus our analysis on former communist countries, non-Eurozone members. In light of our knowledge, this is the first paper that analyses the ECB's effects on CEECs, all Eurozone candidates. Doing so, we allow the exploration of the impacts of the ECB's instruments on CEECs like a group. Other works close to ours restrict the number of CEECs to three (Horvath and Voslarova, 2017). Second, certain works (Horvath and Voslarova (2017) and Kucharčuková et al. (2016)) employ the GDP, the inflation rate, or the interest rate as response variables for counting the ECB's unconventional monetary policies effect in CEECs. Hence, no paper uses, as far as we know, the liquidity spread to measure the ECB's unconventional monetary policies effects in CEECs. The need for this differential is essential because CEECs are supposed to be the next Eurozone members, and the interest rates should converge the ECB's path. The two papers closest to ours, investigating the ECB's unconventional monetary policies spillovers in CEECs are Horvath and Voslarova (2017) and Kucharčuková et al. (2016). The former restrains the CEECs area, and they present the response of ECB's effects on GDP and inflation rate. The latter displays a mix of EU members. Some of them are not to be expected to adopt the euro and others are Eurozone candidates, which therefore become part of the Euro sphere. They present the difference between conventional and unconventional ECB's monetary policy with responses in the inflation rate, Euribor, and industrial production. 3 The results obtained highlight that liquidity spread decreases with both the ECB's balance-sheet extension and LTRO programs, mostly in Croatia and Romania. The yield spread is increasing faster with the launch of LTRO operations in almost all CEECs. Furthermore, we analyze the response of CEECs like a group in comparison with the Eurozone, and we find that the latter benefits more from the ECB's unconventional monetary policies than CEECs. The unconventional monetary policy aims at softening the conventional policy when the reference interest rate is at the Zero Lower Bound. The transmission channel, via the interest rate, shows that the ECB’s operations reduce both bank deposit and lending rates. Moreover, the investors look for higher yield (Beyer et al. (2017) via risk-taking channel) or longer maturity. An increase in yield spread is observed by Fahr et al. (2013) due to the short spectrum of maturities at which liquidity was provided (i.e., LTRO).