ECB Monetary Policy Transmission During Normal and Negative Interest Rate Periods

43 Pages Posted: 27 Mar 2017

See all articles by Falk Bräuning

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston

Botao Wu

New York University (NYU) - Leonard N. Stern School of Business

Date Written: March 24, 2017

Abstract

We analyze monetary policy transmission in the euro area from 2009--2016, including changes during the negative interest rate policy (NIRP) period as of June 2014. We identify three dimensions of ECB monetary policy related to surprise changes in (i) the target rate, (ii) the expected future path of the target rate (path factor), and (iii) longer-term interest rates (term factor). We find that surprise shocks about the target rate and the future path of the target rate have strong effects on interbank lending rates and government bond yields. Moreover, expansionary monetary policy surprises related to the term factor decrease government bond yields across all maturities and have strongest effects on medium- and long-term maturities. Prices of riskier assets, such as longer-term assets, sovereign bonds from crisis countries, or equities, increase significantly more in response to expansionary monetary policy shocks during the NIRP period. Moreover, during the NIRP period, expansionary target rate shocks further decrease loan interest rates and strongly increase the origination of new bank loans to businesses and households, particularly for loans with longer maturities.

Keywords: Monetary policy, negative interest rates, financial markets, bank lending

JEL Classification: E44, E52, E58, G21

Suggested Citation

Bräuning, Falk and Wu, Botao, ECB Monetary Policy Transmission During Normal and Negative Interest Rate Periods (March 24, 2017). Available at SSRN: https://ssrn.com/abstract=2940553 or http://dx.doi.org/10.2139/ssrn.2940553

Falk Bräuning (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Botao Wu

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 W 4th Street
Suite 9-160
New York, NY 10012
United States

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