Spillover effects of unconventional monetary policy on capital markets in the shadow of the Eurozone: A sample of non-Eurozone countries

Issue: 2/2020

Gábor Dávid Kiss

habil. PhD; associate professor, University of Szeged, Faculty of Economics and Business Administration, kiss.gabor.david@eco.u-szeged.hu

Mercédesz Mészáros

PhD student, University of Szeged, Faculty of Economics and Business Administration, m.mercedesz@eco.u-szeged.hu

The transmission mechanism has been dominated by direct monetary measures since the crisis of 2008. While the indirect impacts of the unconventional monetary instruments have not been fully explored yet. Monetary policy and funding conditions determine pricing sentiments for bond, stock and currency markets, represented by the volatilities of their main indicators: stock market indices, exchange rates, and yield premia. Our theoretical model takes spillover effects into account when it determines the variables which are responsible for volatility: the activities of international financial institutions (like the ESM or the IMF) are represented by dummy variables, while the limited autonomy in the shadow of the ECB is captured through gravity-like approaches. Six EU member states outside the Eurozone and Switzerland were analysed between 2007 and 2019 with random effect panel regression models to identify the differences in the impact of spillover effects on capital market volatilities. The results obtained are considered to be useful in mapping the potential effects of continuing monetary easing in the near future

Pages: 
171-195
DOI: 10.2478/revecp-2020-0008
JEL: G15, E58, E52, E44, E43, C33
Keywords: unconventional monetary policy; QE; spillover effects; capital markets
References: 

AGGARWAL, R., (1981), Exchange Rates and Stock Prices: A Study of U.S. Capital Market under Floating Exchange Rates, Akron Business and Economic Review, Vol. 3, No. 9, pp.7–12.

AIZENMAN, J., CHINN, M. D., ITO, H., (2016), Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions, Journal of International Money and Finance, Vol. 68, pp.298-330. DOI: 10.1016/j.jimonfin.2016.02.008

ALBERTAZZI, U., BECKER, B., BOUCINHA, M., (2018), Portfolio rebalancing and the transmission of large-scale asset programmes: evidence from the euro area, ECB Working Paper No. 2125. Available at SSRN: https://ssrn.com/abstract=3116084.

BERNANKE, B. S., REINHART, V. R., SACK, B., (2004), Monetary policy alternatives at the zero bound: An empirical assessment, Brookings papers on economic activity, 2004, Vol. 2, pp.1-100. DOI: 10.1353/eca.2005.0002

BERNANKE, B. S., REINHART, V. R., (2004), Conducting monetary policy at very low short-term interest rates, American Economic Review, Vol. 94, No. 2, pp.85-90. DOI: 10.1257/0002828041302118

BERNANKE, B. S., (2012), Monetary Policy since the Onset of the Crisis, Remarks at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, 2012.09.31., Online: http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.pdf.

BLANCHARD, O., CERUTTI, E., SUMMERS, L., (2015), Inflation and Activity - Two Explorations and their Monetary Policy Implications, IMF Working Papers, 2015/230.

BORIO, C., DISYATAT, P., (2010), Unconventional monetary policies: an appraisal, The Manchester School, Vol. 78, pp.53-89. DOI: 10.1111/j.1467-9957.2010.02199.x

BRŮHA, J., TONNER, J., (2018), Independent Monetary Policy Versus a Common Currency: A Macroeconomic Analysis for the Czech Republic Through the Lens of an Applied DSGE Model, CNB Working Paper Series, Czech National Bank, No. 2018/19.

CIARLONE, A., COLABELLA, A., (2018), International Spillovers of Non-standard Monetary Policy: Evidence From Central and Eastern Europe In. FERRARA et al. (eds.), International Macroeconomics in the Wake of the Global Financial Crisis, Springer International Publishing AG, Vol. 46, pp. 271-300.

CSIKI, M., KISS, G. D., (2018), Capital Market Contagion in the Stock Markets of Visegrád Countries Based on the Heckman Selection Model, Financial and Economic Review, Vol. 17, No. 4, pp.23-52.

CZECZELI, V., (2017), Az EKB mennyiségi lazítási programjának tapasztalatai’, Európai tükör, Vol. 20, No. 1, pp.103-126.

DEMIR, İ., (2014), Monetary policy responses to the exchange rate: Empirical evidence from the ECB, Economic Modelling, Vol. 39, pp.63-70. DOI: 10.1016/j.econmod.2014.02.024

ELLISON, M., TISCHBIREK, A., (2014), Unconventional government debt purchases as a supplement to conventional monetary policy, Journal of Economic Dynamics and Control, Vol. 43, pp.199-217. DOI: 10.1016/j.jedc.2014.03.012

EKSI, O., TAS, B. K. O., (2017), Unconventional monetary policy and the stock market’s reaction to Federal Reserve policy actions, The North American Journal of Economics and Finance, Vol. 40, pp.136-147. DOI: 10.1016/j.najef.2017.02.004

ESER, F., SCHWAAB, B., (2016), Evaluating the impact of unconventional monetary policy measures: Empirical evidence from the ECB׳ s Securities Markets Programme, Journal of Financial Economics, Vol. 119, No. 1, pp.147-167. DOI: 10.1016/j.jfineco.2015.06.003

FALAGIARDA, M., MCQUADE, P., TIRPÁK, M., (2015), Spillovers from the ECB's non-standard monetary policies on non-euro area EU countries: evidence from an event-study analysis, No. 1869. ECB working paper.

FARMER, R. E. A., (2013), Qualitative easing: a new tool for the stabilisation of financial markets, Bank of England Quarterly Bulletin, Vol. 53, No. 4, pp.405–413.

FASSAS, A. P., PAPADAMOU, S., (2018), Unconventional monetary policy announcements and risk aversion: evidence from the US and European equity markets, The European Journal of Finance, Vol. 24, No. 18, pp.1885-1901. DOI: 10.1080/1351847X.2018.1496943

FAUSCH, J., SIGONIUS, M., (2018), The impact of ECB monetary policy surprises on the German stock market, Journal of Macroeconomics, Vol. 55, pp.46-63. DOI: 10.1016/j.jmacro.2017.09.001

FELCSER, D., SOÓS, G. D., VÁRADI, B., (2015), A kamatcsökkentési ciklus hatása a magyar makrogazdaságra és a pénzügyi piacokra, Hitelintézeti Szemle, Vol. 14, pp.39-59.

FRANKEL, J., (2011), Monetary Policy in Emerging Markets, in: FRIEDMAN B. M., Woodford M. (eds.): Handbook of Monetary Economics, Elsevier, pp.1441-1499

FRATZSCHER, M., DUCA, M. L., STRAUB, R., (2016), ECB unconventional monetary policy: Market impact and international spillovers, IMF Economic Review, Vol. 64, No. 1, pp.36-74. DOI: 10.1057/imfer.2016.5

FRATZSCHER, M., (2012), Capital flows, push versus pull factors and the global financial crisis, Journal of International Economics, Vol. 88, No. 2, pp.341-356. DOI: 10.1016/j.jinteco.2012.05.003

GABRISCH, H., (2017), Monetary policy independence reconsidered: evidence from six non-euro members of the European Union, Empirica, Vol. 44, No. 3, pp.567-584. DOI: 10.1007/s10663-016-9337-3

GAGNON, J. E., BAYOUMI, T., LONDONO, J. M., SABOROWSKI, C., SAPRIZA, H., (2017), Direct and spillover effects of unconventional monetary and exchange rate policies, Open Economies Review, Vol. 28, No. 2, pp.191-232. DOI: 10.1007/s11079-017-9437-0

GERTLER, M., KARADI, P., (2011), A model of unconventional monetary policy, Journal of monetary Economics, Vol. 58, No. 1, pp.17-34. DOI: 10.1016/j.jmoneco.2010.10.004

GOLDSTEIN, I., WITMER, J., YANG, J., (2018), Following the Money: Evidence for the Portfolio Balance Channel of Quantitative Easing, Bank of Canada, Staff Working Paper 2018-33.

GREENE, W. H., (2003), Econometric analysis, Pearson Education, India.

HABIB, M. M., STRACCA, L. (2012), Getting beyond carry trade: What makes a safe haven currency?, Journal of International Economics, Vol. 87, No. 1, pp.50-64. DOI: 10.1016/j.jinteco.2011.12.005

HAITSMA, R., UNALMIS, D., de HAAN, J., (2016), The impact of the ECB's conventional and unconventional monetary policies on stock markets, Journal of Macroeconomics, Vol. 48, pp.101-116. DOI: 10.1016/j.jmacro.2016.02.004

HAMORI, S., HAMORI, N., (2010), Introduction of the euro and the monetary policy of the European Central Bank, World Scientific, 2010.

HERYÁN, T., TZEREMES, P. G., (2017), The bank lending channel of monetary policy in EU countries during the global financial crisis, Economic modelling, Vol. 67, pp.10-22. DOI: 10.1016/j.econmod.2016.07.017

HOFMANN, B., TAKÁTS, E., (2015), International Monetary Spillovers, BIS Quarterly Review, September 2015, Available at SSRN: https://ssrn.com/abstract=2661596.

IM, K. S., PESARAN, M. H., Shin, Y., (2003), Testing for unit roots in heterogeneous panels, Journal of econometrics, Vol. 115, No. 1, pp.53-74. DOI: 10.1016/S0304-4076(03)00092-7

ITO, T., (2014), We are all QE-sians now, Institute for Monetary and Economic Studies, Bank of Japan, Discussion Paper, (2014-E), Vol. 5.

JÄGER, J., GRIGORIADIS, T., (2017), The effectiveness of the ECB’s unconventional monetary policy: Comparative evidence from crisis and non-crisis Euro-area countries, Journal of International Money and Finance, Vol. 78, pp.21-43. DOI: 10.1016/j.jimonfin.2017.07.021

JAMMAZI, R., FERRER, R., JARENO, F., HAMMOUDEH, S., (2017), Main driving factors of the interest rate-stock market Granger causality, International Review of Financial Analysis, Vol. 52, pp.260–280. DOI: 10.1016/j.irfa.2017.07.008

JOYCE, M., MILES, D., SCOTT, A., VAYANOS, D., (2012), Quantitative easing and unconventional monetary policy–an introduction, The Economic Journal, Vol. 122, No. 564, pp.F271-F288. DOI: 10.1111/j.1468-0297.2012.02551.x

KENOURGIOS, D., DRAKONAKI, E., DIMITRIOU, D., (2019), ECB’s unconventional monetary policy and cross-financial-market correlation dynamics, The North American Journal of Economics and Finance, Vol. 50, 101045. DOI: 10.1016/j.najef.2019.101045

KHOLODILIN, K., MONTAGNOLI, A., NAPOLITANO, O.,SILIVERSTOVS, B., (2009), Assessing the impact of the ECB's monetary policy on the stock markets: A sectoral view, Economics Letters, Vol. 105, No. 3, pp.211-213. DOI: 10.1016/j.econlet.2009.08.006

KISS, Á., SZILÁGYI, K., (2014), Miért más ez a válság, mint a többi? Az adósságleépítés szerepe a nagy recesszióban, Közgazdasági Szemle, Vol. 61, No. 9, pp.949-974.

KISS, G. D., CSIKI, M., VARGA, J. Z., (2019), Comparing the IMF and the ESM through Bond Market Premia in the Eurozone, Public Finance Quarterly, Vol. 64, No. 2, pp.281-296.

KREKÓ, J., BALOGH, Cs., LEHMANN, K., MÁTRAI, R., PULAI, G,, VONNÁK, B., (2012), Nemkonvencionális jegybanki eszközök alkalmazásának nemzetközi tapasztalatai és hazai lehetőségei, MNB-Tanulmányok 100., Budapest.

KRYZANOWSKI, L., ZHANG, J., ZHONG, R., (2017), Cross-financial-market correlations and quantitative easing, Finance Research Letters, Vol. 20, pp.13-21. DOI: 10.1016/j.frl.2016.06.011

KUCHARČUKOVÁ, O. B., CLAEYS, P., VAŠÍČEK, B., (2016), Spillover of the ECB's monetary policy outside the euro area: How different is conventional from unconventional policy?, Journal of Policy Modeling, Vol. 38, No. 2, pp. 199-225. DOI: 10.1016/j.jpolmod.2016.02.002

LIPPAI-MAKRA, E., RÁDÓCZI, Zs., KOVÁCS, Zs., (2019), Intellectual capital disclosure of Hungarian and Czech Listed firms, European Financial and Accounting Journal, [forthcoming]

MAGGIO, M. D., KERMANI, A., PALMER, C., (2016), How quantitative easing works: Evidence on the refinancing channel, No. w22638, National Bureau of Economic Research.

PÁL, T., (2018), Characteristics and perspectives of the European quantitative easing, Review of Economics Theory and Practice, Vol. 13, No. 4, pp.138-167.

PELLE, A,. VÉGH, M., (2019), How has the Eurozone Changed Since its Inception?, Public Finance Quarterly, Vol. 64, No. 1, pp.127-145.

RANALDO, A., SÖDERLIND, P., (2010), Safe Haven Currencies, Review of Finance, Vol. 14, No. 3, pp.385-407. DOI: 10.1093/rof/rfq007

RIGOBON, R., (2003), Identification through heteroskedasticity, Review of Economics and Statistics, Vol. 85, No. 4, pp.777-792. DOI: 10.1162/003465303772815727

ROBINSON, T., STONE, A., (2006), Monetary Policy, Asset-Price Bubbles, and the Zero Lower Bound, In Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Vol. 15, pp.43-90. University of Chicago Press.

SÁGI, J., LENTNER, C., (2019), Post-crisis trends in household credit market behavior: evidence from Hungary, Banks and Bank Systems, Vol. 14, No. 3, pp.162-174. DOI: 10.21511/bbs.14(3).2019.14

SHIRAI, S., (2014), Japan’s monetary policy in a challenging environment, Eurasian Economic Review, Vol. 4, No.1, pp.3-24. DOI: 10.1007/s40822-014-0006-1

STAVÁREK, D., (2010), Exchange Market Pressure and De Facto Exchange Rate Regimes in the Euro Candidates, Romanian Journal of Economic Forecasting, Vol. 0, No. 2, pp.119-139.

STEELEY, J. M., (2017), The effects of quantitative easing on the integration of UK capital markets, The European Journal of Finance, Vol. 23, No. 11, pp.999-1024. DOI: 10.1080/1351847X.2015.1067635

TAYLOR, J. B., WILLIAMS J. C., (2011), Simple and Robust Rules for Monetary Policy, in: FRIEDMAN B. M., WOODFORD M. (eds.): Handbook of Monetary Economics, Elsevier, pp.829-856.

TAMAKOSHI, G., HAMORI, S., (2014), Co–movements among major European exchange rates: A multivariate time-varying asymmetric approach, International Review of Economics and Finance, Vol. 31, pp.105-113. DOI: 10.1016/j.iref.2014.01.016

TARAFÁS, I., (2016), Kinyílnak-e az őszirózsák? Kitekintés a válság utáni monetáris politikára, Közgazdasági Szemle, Vol. 63, No. 5, pp.548-563. DOI: 10.18414/KSZ.2016.5.548

THORNTON, D. L., (2014), QE: is there a portfolio balance effect?, Federal Reserve Bank of St. Louis Review, Vol. 96, No. 1, pp.55-72.

VARGHESE, R., ZHANG, Y. S., (2018), A New Wave of ECB’s Unconventional Monetary Policies: Domestic Impact and Spillovers, International Monetary Fund.

WANG, Y. C., WANG, C. W., HUANG, C. H., (2015), The impact of unconventional monetary policy on the tail risks of stock markets between US and Japan, International Review of Financial Analysis, Vol. 41, pp.41-51. DOI: 10.1016/j.irfa.2015.05.020

WOODFORD, M., (2012), Inflation targeting and financial stability, NBER Working Paper No.17967, National Bureau of Economic Research, 2012.