Euro Area Monetary Policy in Uncharted Waters

IMF Working Papers, August 1, 2009

Source details

The paper analyzes the European Central Bank's (ECB's) response to the global financial crisis.
The core part of the ECB's monetary policy transmission—from policy rates to market rates—continued to operate during the crisis, but with decreased efficiency.
There is evidence that the ECB's non-standard measures reduced money market term spreads, facilitating pass-through from policy to market rates.
Results imply that the substantial increase in the ECB's balance sheet may have contributed to a reduction in government bond term spreads.

Identified non-standard measures:
- Lengthening of the maturity of monetary policy operations.
- Provision of funds at the fixed rate.
Observed effects:
- Reduction in money market term spreads.
- Improved pass-through from policy rates to market rates via narrower term spreads.

Core transmission channel (policy rates → market rates):
- Continued to function during the global financial crisis.
- Functioned at a decreased efficiency relative to non-crisis periods.
Balance sheet effects:
- Substantial increase in the ECB's balance sheet is associated with a reduction in government bond term spreads.

By Emil Stavrev, Thomas Harjes, Martin Cihak; August 1, 2009.