Sudden Stops and Asset Purchase Programmes in the Euro Area

46 Pages Posted: 7 Oct 2021

See all articles by Josefina Fabiani

Josefina Fabiani

The University of Manchester

Michael Fidora

European Central Bank (ECB)

Ralph Setzer

European Central Bank (ECB)

Andreas Westphal

European Central Bank (ECB)

Nico Zorell

European Central Bank (ECB)

Date Written: October, 2021

Abstract

This paper analyses the incidence and severity of sudden stops in euro area countries before and after the introduction of the ECB’s asset purchase programmes. We define sudden stops as abrupt declines in private net financial inflows, i.e. total flows adjusted for EU and IMF loans and changes in TARGET2 balances. Distinguishing between mild and severe sudden stops, we document that sudden stops were overall more frequent and more severe in euro area countries compared to other OECD economies over the period 1999–2020. On the basis of a multinomial logit model, we find that the susceptibility of euro area countries to severe sudden stops mainly reflects domestic fundamentals whereas there is no clear evidence of an adverse direct effect of being part of the euro area. On the contrary, TARGET2 appears to act as an “automatic stabiliser”, counteracting sudden stops in private financial i nflows. Moreover, our econometric analysis suggests that the asset purchase programmes implemented by the ECB since 2015 have overall almost halved the risk of severe sudden stops in euro area countries. We find tentative evidence that this effect operates through confidence channels.

Keywords: ECB asset purchase programmes, financial flows, monetary policy, sudden stops

JEL Classification: F21, F31, F32, F41, F45

Suggested Citation

Fabiani, Josefina and Fidora, Michael and Setzer, Ralph and Westphal, Andreas and Zorell, Nico, Sudden Stops and Asset Purchase Programmes in the Euro Area (October, 2021). ECB Working Paper No. 2021/2597, Available at SSRN: https://ssrn.com/abstract=3937767 or http://dx.doi.org/10.2139/ssrn.3937767

Josefina Fabiani (Contact Author)

The University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Michael Fidora

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 5713 (Phone)

Ralph Setzer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andreas Westphal

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Nico Zorell

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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