ECB's Quantitative Easing - What Effects, Through Which Channels?

• Název práce v češtině: Kvantitativní uvolňování peněz ECB - efekty a kanály působení
• Název v anglickém jazyce: ECB's Quantitative Easing - What Effects, Through Which Channels?
• Akademický rok vypsání: 2014/2015
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: doc. Mgr. Tomáš Holub, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 12.06.2015
• Datum zadání: 17.06.2015
• Datum a čas obhajoby: 14.09.2016 00:00
• Místo konání obhajoby: IES
• Datum odevzdání elektronické podoby: 29.07.2016
• Datum proběhlé obhajoby: 14.09.2016
• Oponenti: PhDr. Jitka Lešanovská, Ph.D.

Zásady pro vypracování

The thesis will identify the effects of European Central Bank direct purchases of government securities on the real economy, as it is valuable information for future usage of unconventional monetary policies which could one day become conventional.

Hypothesis #1:
Large scale purchases of government bonds affects the yield curves of highly rated fixed interest rate financial securities but has substantially lower effect on lower rated corporate bonds and mortgages rates.

Hypothesis #2:
Large scale purchases of government bonds lead to a depreciation of Euro currency.

Hypothesis #3:
Large scale purchases of government bonds create controllable inflationary pressures, i.e. through the wealth channel, debt-service channel, exchange rate channel and interest-rate channel they support the consumption and investment, but lower the inflation uncertainty.

The author will use standard statistical and econometric techniques. Next to other tools, he will employ vector autoregression class models. Further, he will use the counterfactual analysis to estimate the development of macroeconomic variables if the QE was not employed among monetary policy tools. He will use data of macroeconomic variables as well as daily financial data.

Seznam odborné literatury

Krishnamurthy, Arvind and Vissing-Jorgensen, Annette, (2011), The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy, No 17555, NBER Working Papers, National Bureau of Economic Research, Inc, http://EconPapers.repec.org/RePEc:nbr:nberwo:17555.

Kapetanios, George, Mumtaz, Haroon, Stevens, Ibrahim and Theodoridis, Konstantinos, (2012), Assessing the Economy‐wide Effects of Quantitative Easing, Economic Journal, 122, issue 564, p. F316-F347, http://EconPapers.repec.org/RePEc:ecj:econjl:v:122:y:2012:i:564:p:f316-f347.

Schenkelberg, Heike and Watzka, Sebastian, (2013), Real effects of quantitative easing at the zero lower bound: Structural VAR-based evidence from Japan, Munich Reprints in Economics, University of Munich, Department of Economics, http://EconPapers.repec.org/RePEc:lmu:muenar:19757.

Predescu, Mirela, Hull, John C. and White, Alan, (2004), The Relationship between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements. Rotman School of Management Working Paper No. 2173171, http://ssrn.com/abstract=2173171.

Joyce, Michael, Miles, David, Scott, Andrew and Vayanos, Dimitri, (2012), Quantitative Easing and Unconventional Monetary Policy – An Introduction. The Economic Journal, Vol. 122, Issue 564, pp. F271-F288, 2012, http://ssrn.com/abstract=2168581.

Christensen, Jens H.E. and Rudebusch, Glenn D., (2012), The Response of Interest Rates to US and UK Quantitative Easing, The Economic Journal. Vol. 122, Issue 564, pp. F385-F414.
Banbura, Marta, Giannone, Domenico and Reichlin, Lucrezia, (2010), Large Bayesian vector auto regressions, Journal of Applied Econometrics, Vol. 25, pp. 71–92.

Předběžná náplň práce v anglickém jazyce

The financial crisis of 2007–09 witnessed unprecedented policy responses from central banks. As a prompt response central banks provided additional liquidity and lowered policy interest rates. However, as the financial crisis spilled over into the real economy, central banks found themselves to be constraint by the nominal interest rate zero-lower-bound and, hence, initiated programs of unconventional monetary policies to provide additional monetary easing. The programs included extraordinary measures to provide further liquidity to short-term funding markets (new or expanded credit facilities), as well as expanding central bank balance sheets by large scale purchases of longer-term government bonds and other assets – often referred to as quantitative easing (QE). The aim of these tools is to put direct upward demand pressure on the price of the targeted securities and, therefore, to lower their yields.

The European Central Bank (ECB) pursues an almost symmetric definition of price stability – high inflation is as dangerous to the economy as deflation. Since the interest rate instrument alone has not been sufficient to steer current low inflation closer to 2% target, the ECB followed the steps of other major central banks and used outright asset purchases as part of their monetary policy. The necessary intermediate condition to push inflation upwards is the increase of investment and production. Hence, the asset purchase program promises to promote economic growth consistently with achieving the price stability objective. Since the asset purchase programmes are unprecedented by its magnitude, it is important to investigate their effects on the real economy. This is important for several reasons. First, the asset purchase programmes could be adjusted in the meantime if the effects show not to match the expectations. Second, the thorough analysis helps the ECB to design the policies involving quantitative easing (QE) in the future.

Large scale asset purchases (LSAPs) could affect the economy through various channels:

1. Interest rate channel:
Lower yields on government bonds potentially encourage investors to search for the yield elsewhere, and, hence, the increased demand lowers the interest rates in riskier assets. This process is driven by different sub-channels. As summarized by Krishnamurthy and Vissing-Jorgensen (2011) it is duration risk channel, liquidity channel, safety premium channel, prepayment risk premium channel, default risk channel and inflation channel.
Interest rate channel further increases the efficiency of fiscal expansion, as lower interest rates mitigate the crowding out effect.

2. Wealth channel:
The higher demand for assets increases their prices and thereby wealth of their holders. This consequently supports consumption.

3. Debt-service channel:
Lowering the cost of debt service further stimulates consumption and investment.

4. Exchange rate channel:
Lower interest rates in the euro area put downward pressure on the exchange rate with respect to other currencies and favour demand for domestic products both in foreign and domestic markets.

5. Inflation expectations channel:
Since the reputation of the European Central Bank is solid and since the policy goal to higher inflation was well communicated with the public, the ECB’s actions increases the inflation in expectations and ceteris-paribus lowers the real interest rates. Low real interest rate environment then supports the investments and consumption.

There is only little guidance from previous experience that could be used to judge the expected impact of unconventional monetary tool by the ECB. Currently, there are analyses of the effects of QE employed by the Federal Reserve System, the Bank of England and the Bank of Japan. They usually focus on the long-term interest rate response and do not try to investigate the full class of effects on real economy or the related channels. Furthermore, one could argue that the reaction in the euro area context could differ largely. This could be driven by the reliance on the bank-based financial system in the euro area as opposed to the market-based financial system in the United States and Great Britain.

The thesis will focus on the impact of QE on the yields of financial securities, inflationary pressures, nominal exchange rates and economic growth respectively.

Outline:

1. Introduction
2. Literature survey
3. ECB’s quantitative easing structure and hypotheses of its effects
4. Description of econometric models
5. Description of data
6. Interpretation of the estimates consistently with underlying theories
7. Policy implications
8. Conclusion