The Financial Market Effects of the ECB's Balance Sheet Policies

Abstract

The European Central Bank’s balance sheet policies have been criticized as ineffective or even harmful to the economy. This paper aims at gauging the effects on financial markets, the banking sector and lending to non-financial firms. Using a structural vector autoregression analysis, we find that balance sheet innovations help to decrease financial stress, stock market risk and default rates initially. However, these beneficial effects on financial markets are overturned in the medium run. Credit expands significantly and persistently. While output rises immediately, the positive effect is short-lived and economically small. Prices do not respond significantly to the shock.

Keywords: Balance sheet, unconventional monetary policy, central bank, shock identification, VAR

JEL Classification: C32, E44, E52, E58