## ECB Spillovers to Emerging Europe: The Past and Current Experience

_IMF Working Papers, August 9, 2024_

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## Bibliographic details
- Authors: Philipp Engler, Gianluigi Ferrucci, Pawel Zabczyk, Tianxiao Zheng
- Published: August 9, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400284540.001

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### Authors and publication
- By Philipp Engler, Gianluigi Ferrucci, Pawel Zabczyk, Tianxiao Zheng
- August 9, 2024
- IMF Working Papers, Working Paper No. 2024/170
- Pages: 32; Volume: 2024; Issue: 170; DOI: https://doi.org/10.5089/9798400284540.001
- Stock No: WPIEA2024170; ISBN: 9798400284540; ISSN: 1018-5941

### Research question and scope
- Objective: Provide new evidence on the spillover effects of ECB monetary policy shocks to emerging European economies.
- Geographic/sample scope: Panel of 16 Emerging European countries spanning 1999 to 2022.
- Policy instruments analyzed: Interest rate policies and balance sheet policies implemented by the ECB (including quantitative tightening and balance sheet reduction).
- Event focus: ECB policy announcement in June 2022 (event study window around this announcement).

### Methods
- Empirical approaches:
  - Event study set around the ECB policy announcement in June 2022.
  - Local projections to estimate regional spillovers in a panel covering 1999–2022.
- Identification strategy:
  - ECB monetary policy shocks identified as the unexplained component of changes in the three-month Euribor futures rate.
- Structural modeling:
  - Model simulations using a two-country DSGE calibrated to the euro area and its Eastern European neighbors.

### Key empirical findings
- ECB monetary policy tightening effects on Emerging Europe:
  - More than one-for-one changes in government bond yields.
  - Sizable increases in sovereign spreads.
  - Domestic currency depreciations.
  - Significantly lower output.
- Identification detail preserved:
  - Shocks are the unexplained component of changes in the three-month Euribor futures rate.
- Sample period reiterated: 1999 to 2022.
- Event highlighted: ECB policy announcement in June 2022.

### Model simulation results
- Two-country DSGE simulations indicate:
  - Conventional tightening (achieved through interest rate increases) provides a more favorable inflation-output trade-off compared to balance sheet tightenings.
  - The extent of spillovers from quantitative tightening depends on the speed of balance sheet reduction.
  - Spillovers from balance sheet reduction are larger under a fixed exchange rate regime.

### Policy implications and interpretation
- Interest-rate-based conventional tightening may be preferable to balance-sheet-based tightening when considering the inflation-output trade-off for Emerging Europe.
- Pace of balance sheet reduction matters for the magnitude of international spillovers.
- Exchange rate regimes moderate spillovers: fixed exchange rate regimes amplify spillovers from quantitative tightening.

### Subject tags and keywords (as provided)
- Subject: Central bank policy rate, Exchange rate arrangements, Exchange rates, Financial sector policy and analysis, Financial services, Foreign exchange, Monetary policy, Monetary tightening, Spillovers
- Keywords: Central bank policy rate, Eastern Europe, ECB asset purchase portfolio, ECB monetary policy shock, ECB monetary policy tightening, ECB policy announcement, ECB spillover, Europe, Exchange rate arrangements, Exchange rates, Global, International Spillovers, Monetary Policy, monetary policy spillover, Monetary tightening, Quantitative Easing, Spillovers

*Source: IMF Working Papers — "ECB Spillovers to Emerging Europe: The Past and Current Experience", Philipp Engler, Gianluigi Ferrucci, Pawel Zabczyk, Tianxiao Zheng, August 9, 2024.*

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_Source: https://www.imf.org/en/publications/wp/issues/2024/08/09/ecb-spillovers-to-emerging-europe-the-past-and-current-experience-553162_