Do the ECB’s Monetary Policies Benefit Emerging Market Economies? A GVAR Analysis on the Crisis and Post-Crisis Period

Abstract

This paper studies the spillover effects of the ECB’s monetary policies on non-euro area countries over the period 2004-2016, using a GVAR methodology, applied to a large sample of countries and an ample set of variables. Monetary policies are proxied by short-term interest rates and the Wu and Xia’s (2016) shadow rates in the euro area, the US and the UK. Identification is performed via a Cholesky decomposition in the euro area only. An increase in the euro area shadow interest rate triggers a broad-based and persistent output decline abroad, especially strong in Central Eastern and South-Eastern European economies. The euro area shadow rate increase is also transmitted to the short-term interest rates of a number of countries, although such rises are short-lived and not as widespread as the GDP spillovers. There is evidence that differences in countries’ responses to the euro area monetary shock depend on their characteristics. The spillover effects are transmitted mainly through the trade channel and also, to a lesser extent, the short-term interest rate channel.

Keywords: Global VAR, spillover, euro area monetary policy, Europe, CESEE

JEL Classification: C32, E32, E52, E58, F41, O52