Global Finance Journal: Franziska Collingro, Michael Frenkel

Global Finance Journal xxx (xxxx) xxxx
Contents lists available at ScienceDirect
Global Finance Journal

journal homepage: www.elsevier.com/locate/gfj
On the financial market impact of euro area monetary policy: A

comparative study before and after the Global Financial Crisis☆
⁎
Franziska Collingro , Michael Frenkel
WHU - Otto Beisheim School of Management, Burgplatz 2, 56179 Vallendar, Germany
A R T IC LE I N F O ABS TRA CT
JEL classifications: Using daily data from thirteen euro area and four non-euro countries covering the years 2000 to
E4 2018, we explore whether the Global Financial Crisis 2008–2010 and the introduction of un-
E5 conventional monetary policy measures has led to a change in the financial market impact of
G14 euro area monetary policy. For this purpose, we construct a conservative measure of monetary
policy innovations based on the heteroscedasticity-approach of Rigobon and Sack (2004), and
Keywords:
investigate the response of national and euro-wide equity indices, derived volatility indices, as
Euro area
well as of government bond yields. We find that financial market participants respond more
Financial markets
Global Financial Crisis strongly to monetary policy after the Global Financial Crisis. Moreover, we find that cross-
Monetary policy country differences in the responsiveness of government bond yields correlate with average
national unemployment rates and with inflation rates, suggesting that monetary policy com-
munication was more effective in countries that had faced a severe economic downturn.
1. Introduction
In recent years, empirical studies on the effects of monetary policy have focused on unconventional monetary policy instruments,
especially quantitative easing programs. Central banks began to use such programs, because the zero lower bound of interest rates,
which was reached relatively quickly in the course of fighting the 2008 Global Financial Crisis, significantly reduced their room of
maneuver (Fernandez-Villaverde, Gordon, Guerrón-Quintana, & Rubio-Ramírez, 2015; Wolman, 2005). Research examined quanti-
tative easing programs especially for the USA and the UK and a consensus seems to emerge about their statistically significant and
economically positive impact on the economy (Joyce, Miles, Scott, & Vayanos, 2012; Martin & Milas, 2013).
While evidence by Ehrmann and Fratzscher (2007) suggests that ECB communication does not affect financial markets more
strongly during times of increased economic uncertainty, various other papers emphasize that central bank communication is par-
ticularly effective when interest rates are close to zero (Bernanke, Reinhart, & Sack, 2004; Woodford, 2005). In this case, the level of
the main refinancing rate does not correctly reflect the monetary policy stance, and market participants may pay more attention than
usual to central bank communication. Policy decisions by central banks do not exclusively follow a stable policy rule that relates
policy rates to a selected number of economic variables. Instead, policy decisions depend on much more information, and decision
rules evolve over time (Blinder, Ehrmann, Fratzscher, De Haan, & Jansen, 2008). Given the instability of simple monetary policy
rules, a systematic change in policy instruments such as the one observed in the course of and after the Global Financial and
Sovereign Debt Crises might affect the sign and the magnitude of financial and real economic responses to euro area monetary policy.
For instance, during the Global Financial Crisis, national central banks introduced monetary policy measures not only to guarantee
☆
We thank the anonymous reviewers and the participants of the CEUS Workshop 2019 for their insightful comments and suggestions.
⁎
Corresponding author at: Burgplatz 2, D-56179 Vallendar, Germany.
E-mail address: franziska.collingro@whu.edu (F. Collingro).
https://doi.org/10.1016/j.gfj.2019.100480
Received 31 January 2019; Received in revised form 12 June 2019; Accepted 14 June 2019
1044-0283/ © 2019 Elsevier Inc. All rights reserved.
Please cite this article as: Franziska Collingro and Michael Frenkel, Global Finance Journal,
https://doi.org/10.1016/j.gfj.2019.100480
F. Collingro and M. Frenkel Global Finance Journal xxx (xxxx) xxxx
price stability but also to stabilize financial markets. In essence, they acted as a lender of last resort. In this context, the an-
nouncement of additional expansionary policy measures may actually have increased bond yields, when financial market participants
interpreted these measures as a signal that the crisis was worse than they had previously assumed. Stricter financing conditions may
spill over to the real side of the economy, implying that the announcement of expansionary monetary policy measures may actually
make the economy as a whole worse off.
In this paper, we explore whether a change occurred in the financial market impact of euro area monetary policy that is related to
the Global Financial Crisis and the introduction of unconventional monetary policy instruments. Using a sample of 13 euro area and
four non-euro area economies, we use the heteroscedasticity-based GMM approach of Rigobon and Sack (2004) to assess the response
of euro-area-wide and national equity indices, of derived volatility indices, and of government bond yields to innovations in euro area
monetary policy.
The estimation approach critically depends on the importance of central bank communication in steering financial market ex-
pectations. Several studies have established that central bank communication affects financial markets and expectations of informed
market participants (cf. Blinder et al., 2008; De Haan, 2008; Gertler & Horvath, 2018; Jitmaneeroj, Lamla, & Wood, 2019). Indeed,
the degree of financial market sensitivity to central bank communication increases, when a central bank introduces a change in its
policy stance, while it decreases, when communication reiterates previously available information (Ehrmann & Fratzscher, 2007).
Similarly, Dräger, Lamla, and Pfajfar (2016) show that a fair share of market participants has theory-consistent expectations, con-
firming the rational expectations perspective of market price formation and supporting the role of central bank communication.
The remainder of the paper is structured as follows. Section 2 describes the data and elaborates on theory-derived expectations
regarding the financial market impact of euro area monetary policy. Section 3 explains the estimation method. Section 4 presents the
estimation results. Finally, Section 5 offers conclusions.
2. Data and expected financial market impact
Our study investigates the financial market impact of euro area monetary policy in 17 European Union countries during the period
2000–2018. These countries include ten of the founding members of the euro area: Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Netherlands, Spain, and Portugal. We exclude Luxembourg, although it is a founding member of the euro area, because
constant-maturity government bonds are unavailable. In addition to these countries, our sample includes another three countries for
the period after they adopted the euro: Greece, the Slovak Republic, and Slovenia. Finally, we also study the financial market effects
for four non-euro area EU countries: Bulgaria, which is linked to the euro through a currency board, Czech Republic, Hungary, and
Poland. For the latter four Eastern European economies, we estimate the spillover effects of euro area monetary policy after these
economies joined the European Union. More precisely, we include Czech, Hungarian, and Polish data from May 2004 onward, and
Bulgarian data from January 2007 onward. Regarding the euro area, the same monetary policy applies to all member countries, but
diverse structural economic properties of these countries may cause monetary policy to have different financial market responses,
which may or may not change over time. In order to study possible changes in the response of financial markets over time, we
compute the financial market impact of euro area monetary policy separately for the periods January 2000 to December 2006,
January 2007 to December 2012, and January 2013 to October 2018. This way, the three periods are approximately of equal length.
Moreover, the second period roughly captures the financial market turbulence associated with the Global Financial and the Sovereign
Debt Crises, while the third period captures the ensuing years of low inflation.
Our study investigates economies with a high degree of heterogeneity in their economic structures.1 Table 1 lists key macro-
economic characteristics for these economies. Government debt, for instance, varies between a minimum of 17% of GDP for Bulgaria
in 2012 and a maximum of 183% for Greece in 2018. Within the euro area, the minimum lies at 23% in Slovenia. The interest paid on
long-term government bonds also varies tremendously between the economies, with a minimum of 0.01% for Germany in 2018 and a
maximum of 13.33% for Greece in 2012. Note that according to the uncovered interest parity, interest rates on government bond
yields of the same maturity differ between two countries, when the country-specific risk premia differ or when markets expect the
exchange rate to change. The latter can be expected to be close to zero, when there is a currency union. However, country-specific
risk premia can differ, especially, when financial market participants consider a country's combination of government debt and
medium-term to long-term growth perspectives as unsustainable. Asymmetric shocks may introduce differences in country-specific
risk premia that did not exist before the currency union was introduced. To highlight these differences in risk premia, Table 1 shows
country-specific credit ratings in the last three columns.
In the case of asymmetric shocks, we would expect that the impact of common monetary policy measures can be different: When
aggregate euro area inflation rates call for an increase in monetary policy rates, such a policy may be harmful for an individual euro
area member if it is simultaneously affected by a national adverse economic shock and would therefore require looser credit con-
ditions. However, as this is not possible in a currency union, the country-specific risk premium on bond yields may rise and equity
indices may decrease more than would solely be due to the union-wide monetary policy rate increase. The number of asymmetric
shocks may even increase after the introduction of a currency union, when integrated financial markets and a common currency
encourage regional specialization on specific industries. Our study covers the years 2000 to 2018, a period during which the euro area
was hit by several asymmetric shocks. Euro area members such as Greece and Portugal were strongly affected by the Global Financial
1
Unfortunately, due to the rarity of currency areas between advanced economies, we cannot contrast the results obtained in this study with a
control group.
2
F. Collingro and M. Frenkel
Table 1
Overview of macroeconomics characteristics.
Government debt (% of GDP) Primary deficit (% of GDP) GDP growth (y-o-y, %) Percent of govt. bonds held Interest rate paid on Government bond rating (S&P)
by domestic banks government bonds (10 year
maturity)
2007 2012 2018 2007 2012 2018 2007 2012 2018 2007 2012 2017 Dec Dec 2012 Mar 19 Dec 2007 Dec 2012 Mar 2019
2007
Austria 64.74 81.66 74.24 0.81 −0.02 1.02 3.73 0.68 2.71 14.37 17.02 14.79 4.35 1.77 0.38 AAA AA+ AA+
Belgium 87.03 104.33 101.39 3.65 −1.02 1.18 3.45 0.24 1.43 25.73 26.77 17.00 4.41 2.10 0.54 AA+ AA AA
Bulgaria 17.60 16.67 20.52 3.67 −0.15 0.35 7.34 0.03 3.20 30.09 37.18 40.33 5.08 3.44 0.67 BBB+ BBB BBB−
Czech Republic 27.47 44.47 32.96 −0.03 −2.77 2.07 5.60 −0.80 2.91 42.29 42.82 30.12 4.68 1.92 1.82 A AA− AA−
Finland 33.99 53.91 60.52 4.79 −1.96 −0.88 5.19 −1.43 2.43 10.80 14.29 13.03 4.34 1.60 0.35 AAA AAA AA+
3
France 64.54 90.60 98.59 −0.10 −2.50 −0.87 2.43 0.31 1.52 25.30 22.65 17.00 4.35 2.01 0.44 AAA AA+ AA
Germany 63.66 79.86 59.75 2.59 1.80 2.40 3.37 0.69 1.45 29.87 28.60 24.90 4.21 1.30 0.01 AAA AAA AAA
Greece 103.10 159.59 183.26 −2.21 −1.46 3.76 3.27 −7.30 2.10 4.53 13.33 3.76 A B− B+
Hungary 65.25 78.37 69.39 −1.29 1.80 0.07 0.42 −1.63 4.94 21.78 21.29 29.44 6.93 6.44 3.03 BBB+ BB BBB
Ireland 23.91 119.93 65.20 0.91 −4.81 1.67 5.26 0.19 6.81 4.45 4.67 0.67 AAA BBB+ A+
Italy 99.79 123.36 132.09 3.08 2.09 1.39 1.47 −2.82 0.88 23.38 30.98 26.49 4.54 4.54 2.69 A+ BBB+ BBB
Netherlands 41.97 66.22 54.44 1.33 −2.54 1.81 3.77 −1.03 2.54 21.01 21.33 19.87 4.34 1.56 0.15 AAA AAA AAA
Poland 44.16 53.72 48.36 0.33 −1.05 0.96 7.04 1.61 5.10 21.83 19.89 32.77 5.86 3.88 2.75 A− A− A−
Portugal 68.44 126.22 121.44 −0.47 −1.38 2.59 2.49 −4.03 2.08 9.83 21.34 16.45 4.47 7.25 1.33 AA− BB BBB
Slovak Republic 30.10 52.17 48.85 −1.02 −2.78 0.37 10.80 1.66 4.13 61.06 52.04 21.29 4.61 3.92 0.68 A A A+
Slovenia 22.66 53.79 68.49 1.19 −1.44 3.01 6.94 −2.67 4.49 31.66 29.87 15.00 4.55 5.33 0.67 AA A A+
Spain 35.51 85.74 97.02 3.02 −7.96 −0.45 3.77 −2.93 2.53 24.23 27.61 22.39 4.35 5.34 1.12 AAA BBB− A−
This table presents key macroeconomic characteristics of the seventeen economies, which are investigated in this study. Source: ECB (2019), tradingeconomics.com, IMF (2019).
and the Sovereign Debt Crisis, whereas euro area members such as Germany and the Netherlands were affected to a lesser degree. Due
to close trade relations with the euro area and the presence of currency pegs, we may find that euro area monetary policy com-
munication affects capital markets in EU economies outside the euro area, too. Note that Bulgaria has been in a currency board with
the euro since 1999. The Czech Republic pegged its currency to the euro between November 2013 and April 2017, Hungary pegged
its currency to the euro until the end of January 2008, and Poland has maintained a floating exchange rate regime vis-à-vis the euro.
In order to assess the financial market impact of euro area monetary policy, we consider euro area-wide and country-specific stock
market indices, country-specific government bond yields of differing maturities, volatility indices, as well as the euro-US-dollar
exchange rate. All data are in daily frequency, refer to closing quotes, and are taken from Thomson Reuters EIKON (formerly
Datastream). We consider government bonds with a maturity of one year (short-term), five years (medium-term), and ten years (long-
term). When pre-GFC data of one-year government bond yields are unavailable, we use government bonds with a maturity of two
years. Appendix A provides details of the investigated stock market indices and bonds. Regarding volatility indices, we investigate the
CBOE Volatility Index, that is, the expected standard deviation of the S&P 500 Index in the following 30 trading days, as well as other
volatility indices which we derive from the observed performance of stock market indices during the previous 30 trading days. More
precisely, for each investigated stock market index, we compute a volatility index as the standard deviation of stock market prices
during the past thirty trading days, annualized by the multiplier 365/30 .
In general, tighter monetary policy conditions increase government bond yields and decrease the value of equity indices, because
tighter monetary policy conditions translate into higher overnight and long-term interest rates. Conceptually, the level of the short-
term and long-term government bond yields investigated in this paper depends on current and expected future overnight interest
rates, as well as a term premium. Higher government bond yields induce financial market participants to sell equity and buy bonds.
The financial market responses of government bond yields with different maturities may differ, since longer-term yields include
expectations on future overnight interest rates over a longer time horizon than short-term yields and, thereby, may reflect ex-
pectations of potential changes in monetary policy. For many years, however, the yields on short-term bonds have been close to zero
in euro area economies, which were not or only temporarily affected by the Global Financial and the Sovereign Debt Crises, for
example in Germany. Due to a zero lower bound of interest rates, monetary policy communication is likely to be without any effect on
these government bonds. Global and national volatility may or may not change in response to tighter monetary policy conditions:
When monetary policy communication does not create a lot of news compared to other events that influence asset prices, volatility
does not significantly increase due to a monetary policy communication event. Finally, we expect that a euro area monetary policy
tightening appreciates the euro vis-à-vis the US dollar. Fig. 1 presents for both the euro area and the US the size of the central bank
balance sheet. It becomes evident that monetary policy has been very expansionary in both currency areas in recent years, which may
prevent significant movements of the exchange rate. However, given the event study-like character of our estimation methodology
and the way in which we select communication events (see below), we are unlikely to capture spillover effects of US monetary policy
on euro area capital markets.
We use the 3-month forward on the EURIBOR as the asset price which reflects monetary policy activities. For simplicity, we refer
to this price as the policy instrument. We use this specific asset price for the following three reasons. First, the ECB usually bases its
policy decisions on the aggregate economic circumstances of all member states of the euro area, and the EURIBOR is the euro-wide
interbank offered rate, at which banks in the euro area are willing to lend to each other. We do not use actual policy rates, because the
ECB's main refinancing rate was close to zero between 2014 and 2016 and has been equal to zero thereafter. In addition, actual policy
rates do not reflect all dimensions of monetary policy, including quantitative easing and forward guidance. Second, changes in the
timing of an expected monetary policy change may influence the current-month EURIBOR future. The 3-month future by construction
considers expectations of market participants regarding euro area monetary policy in the following three months, and, thereby, is less
sensitive towards changes in the timing of an expected monetary policy change. Third, the EURIBOR 3-month future continuously
features a high trading activity, which is a necessary prerequisite for an asset price to reflect fully all publicly available information
on euro area monetary policy. Fig. 2 features the price of a three-month EURIBOR future between December 1998 and December
2018 (right axis) as well as the asset-specific total trading volume (left axis), which is an indicator of trading activity. As can be seen
from Fig. 2, trading activity has been continuously high. Note that the 3-month EURIBOR future has been close to or even below zero
in recent years, which may imply a reduced response of the asset price to monetary policy announcements.2 However, as required by
our identification assumptions (see Section 3), we find that the standard deviation of observed price changes in the policy instrument
is higher on policy announcement days than on other days.
3. Estimation methodology
We analyze the financial market impact of euro area monetary policy using the GMM approach introduced by Rigobon and Sack
(2004). This way, as specified more intuitively in Wright (2012), we impose two restrictions which identify the innovation to euro
area monetary policy. First, in line with the efficient market hypothesis, we assume the expected value of the innovation in monetary
policy, as expressed by expected changes in the level of the monetary policy instrument, to be zero on all days, even on days when
monetary policy meetings take place. Second, we assume innovations in monetary policy to occur with higher probability on days
2
Some authors suggest the alternative concept of a shadow rate as for example proposed by Wu and Xia (2016). This shadow rate is typically given
in monthly frequency and is subject to estimation errors. Given that our study investigates announcement effects based on data in daily frequency,
we do not use a shadow rate as policy instrument.
4
Fig. 1. Comparison of US Federal Reserve and ECB total assets.

Source: ECB, Thomson Reuters EIKON.
when monetary policy meetings take place (indicated by F) than on other days (indicated by ~ F). In the more formal words of
Rigobon and Sack (2004), we assume the variance of the innovation in monetary policy to be higher on days when policy an-
nouncements take place. The variance of other innovations, for instance in fiscal policy, is constant across monetary announcement
and non-policy announcement days. To illustrate the equivalence between these two assumptions, we interpret a monetary policy
shock as a Bernoulli event, which takes on the value of unity, when a monetary policy shock occurs, and a value of zero otherwise.
The variance of such a distribution is given by p ∗ (1 − p), where p is the probability of a monetary policy shock. If p is higher on days
when policy announcements take place, this translates into a higher variance on these days. In essence, the estimation approach by
Rigobon and Sack (2004) is similar to an event study approach. While we consider it unlikely that monetary policy makers base their
decisions on same-day asset price movements, it could be that the price of the monetary policy instrument, in our study the 3-month
EURIBOR future, changes due to unrelated events, which may or may not affect other asset prices, too. As observed price changes in
the policy instrument on monetary policy communication days may not exclusively arise due to monetary policy news, Rigobon and
Sack (2004) extend the event study framework and correct the observed price changes on policy communication days by the average
5
F. Collingro and M. Frenkel
6
Fig. 2. Comparison of EURIBOR 3-month future to total market volume and ECB total assets.
Source: ECB, Thomson Reuters EIKON.
amount of observed price changes on non-policy announcement days.

Based on these considerations, Rigobon and Sack (2004) derive the moment conditions as:
T ′ T
⎡ ⎤ ⎡ ⎤ T T
{α, λ} = argmin ⎢∑ bt ⎥ WT ⎢∑ bt ⎥,where bt = vech ⎛⎜ ⎛ δtF −
⎜ δt F̃ ⎞ Δx t Δx t ′ − λ [1 α ] ′[1 α ]).
⎟
⎣ t=1 ⎦ ⎣ t=1 ⎦ ⎝ ⎝ TF TF
̃ ⎠ (1)
The coefficient of interest is α, which measures the impact of an innovation in the policy instrument on the price of a financial
asset. Note that λ is a non-linear combination of α and the degree of heteroscedasticity present in the data, as measured by the
difference in the variance-covariance matrices on policy announcement and non-policy announcement days, respectively. The
variables δF and δ ~F are dummies indicating policy announcement and non-policy announcement days, respectively. T, TF, and T ~F
represent the total number of observations, the number of policy announcement days, and the number of non-policy announcement
days, respectively. The vector Δxt includes the stacked changes in the dependent and independent variable, i.e., the financial asset
yield or price, and the policy instrument. WT is the optimal weighting matrix to be estimated by GMM. For further details, we refer to
Rigobon and Sack (2004).
While a central bank usually targets short-term interest rates, economic decisions depend on medium-term and long-term interest
rates, which are in theory predominantly determined by the discounted expected future short-term interest rates and a term premium.
Combined with the forward-looking behavior of market participants, this observation highlights the importance of policy an-
nouncements, compared to policy implementation, for movements in the financial markets. Therefore, we limit our analysis to
announcement effects. As in Rigobon and Sack (2004), we restrict the number of non-policy announcement days to equal the number
of policy announcement days, and choose as non-policy announcement days the days prior to a policy announcement. We believe that
ECB board members refrain from public comments on monetary policy on the days prior to an official announcement, reducing the
probability of innovations in monetary policy on these days.
We define our set of monetary policy announcement dates in a conservative manner, by exclusively including official ECB Board
meetings and the publication dates of the Monthly Bulletin, as well as of its successor, the Economic Bulletin. The Monthly or
Economic Bulletin provides details on the economic data and considerations, on which the policy decision is based. It also includes
forecasts on future potential inflation. According to Ehrmann et al. (2007), financial market participants most closely pay attention to
these two publications. While some important policy communications have taken place outside these official press releases,3 we
prioritize objectivity and clarity of timing, and therefore do not include policy announcements other than the official ones. As a
robustness test, we re-estimate the financial market impact of euro area monetary policy based on official ECB Board meeting dates
only.
In both cases, we exclude announcement dates with holidays one or two days prior to these dates. Moreover, we exclude dates on
which the Federal Reserve Board announced monetary policy decisions or presented its semi-annual Monetary Policy Report to
Congress up to two days prior to an ECB announcement. This way, we avoid including spillover effects of US monetary policy in our
estimates. Based on this methodology, the investigated time periods include 156 policy announcements in period (1), 107 policy
announcements in period (2), and 79 policy announcements in period (3). When measuring the spillover effects of euro area
monetary policy to the Czech Republic, Hungary, and Poland, we also exclude the dates when the respective national central bank
announces policy decisions up to two days prior to the ECB announcement.4
Standard errors are corrected for heteroskedasticity and autocorrelation. We estimate Eq. (1) by continuously-updating GMM5
and perform the estimation for each asset and country separately. For comparison purposes, we also estimate an event study, which
regresses the observed change in a financial asset price on the change in the policy instrument on policy announcement days. This
way, an innovation in euro area monetary policy is identified as the total observed change in the policy instrument on policy
announcement days. This is a stronger identifying assumption than the one imposed by Rigobon and Sack (2004).6 Since the dis-
tribution of changes in financial asset prices is often not close to a normal distribution, we use a simple bootstrap to assess the
significance of the regressors.
As Martin and Milas (2013) point out, information sufficiency is closely related to the problem that using high-frequency data
often makes it difficult to control for variables that are typically measured at lower than daily frequencies. Rigobon and Sack (2004)
demonstrate that their GMM approach considers the influence of other variables on asset prices. The stronger identifying assumption
of the event study fully assigns any asset price change to the innovation in monetary policy; the impact of simultaneously published
information on other relevant economic issues is not considered.
4. Estimation results
Table 2 shows the results of estimating Eq. (1) for the global volatility index, for the euro-US-dollar exchange rate, and for the
euro area stock market and the associated volatility indices. The first number column presents the results for the period January 2000
3
An example of an important event of policy communication was Mario Draghi's famous and market-moving “Whatever it takes” statement, which
happened during an investment conference in London on July 26, 2012.
4
A complete list of announcement dates is available upon request.
5
Continuously-updating GMM estimation has better finite-sample properties than iterative GMM (see Hansen, Heaton, & Yaron, 1996).
6
The results are available upon request. Note that policy announcements might also include news about future economic growth potential. Such
news is defined as innovations in monetary policy in the event study approach.
7
Table 2
Estimation results for euro-area financial assets.
Financial asset Measure Period (1) Period (2) Period (3)
Global Volatility Index Monetary policy impact 106.70 −45.87* 31.98

(0.79) (0.08) (0.63)
Overidentif. test 0.02 0.41 0.50
Euro-US-Dollar exchange rate Monetary policy impact −1.22 11.38*** 36.95***
(0.69) (0.00) (0.00)
MSCI Index Monetary policy impact −1.44 16.16** −44.43***
(0.88) (0.02) (0.00)
Volatility Index based on MSCI Index Monetary policy impact 15.10 5.10 −27.92
(0.60) (0.82) (0.75)
Stoxx 50 Index Monetary policy impact −0.70 17.21** −47.29***
(0.94) (0.02) (0.00)
Volatility Index based on Stoxx 50 Index Monetary policy impact 21.22 6.93 −85.29
(0.51) (0.75) (0.23)
Stoxx Index (Banks) Monetary policy impact −2.96 16.95 −46.31***
(0.79) (0.13) (0.00)
Volatility Index based on Stoxx Index (Banks) Monetary policy impact 24.94 17.40 33.48
(0.51) (0.36) (0.37)
This table lists, for euro-area-wide financial assets, the estimated impact of euro area monetary policy based on the GMM approach by Rigobon and
Sack (2004). The Table also shows the p-value associated with each point estimate (in parenthesis), and the p-value associated with an over-
identification test based on one additional moment condition. In the latter case, failure to reject the null is consistent with valid identification
assumptions. Period (1) refers to the period Jan. 2000 to Dec. 2006, Period (2) refers to the period Jan. 2007 to Dec. 2012, and Period (3) refers to
the period Jan. 2013 to Oct. 2018.
***, **, and * indicate significance of the estimated coefficients at 1%, 5%, and 10% levels, respectively.
to December 2006 (“Period (1)”), the second number column presents the results for the period January 2007 to December 2012
(“Period (2)”), and the third number column presents the results for the period January 2012 to October 2018 (“Period (3)”). Period
(1) may be interpreted as representing a period of relatively traditional monetary policy measures, period (2) as representing a period
of financial market turbulence associated with the Global Financial Crisis and the Sovereign Debt Crisis, and period (3) as re-
presenting a period of low inflation and unconventional policy measures. For each period and asset, Table 2 lists the point estimates
for the financial market impact of euro area monetary policy based on the identification assumption by Rigobon and Sack (2004), i.e.,
based on the assumption that the variance in monetary policy innovations is greater on monetary policy announcement days than on
non-policy announcement days. Non-policy announcement days refer to the days directly before a policy announcement day. The
policy instrument is the 3-month EURIBOR future. A coefficient of 10 implies that a 100 basis point7 increase in the policy instrument
is associated with an increase in the respective financial asset price by 10%. The values in parenthesis below the point estimate
indicate p-values based on heteroscedasticity and autocorrelation-adjusted standard errors. For each period and asset, Table 1 also
lists the p-value associated with an overidentification test based on one overidentifying moment condition: If we reject the null, the
data provides evidence of a violation of the identifying assumption by Rigobon and Sack (2004).
Using a conservative measure for monetary policy innovations, which biases our coefficient estimates towards insignificance
during periods (2) and (3), our results suggest that euro area monetary policy does not significantly influence stock price indices,
which are based on the best-performing companies in the euro area, during period (1). During periods (2) and (3), stock price indices
feature a significant response to euro area monetary policy communication. We do not find a significant coefficient on volatility
indices in any of these periods. The exception is the Global Volatility Index (Table 2, first row), where we find that tighter monetary
policy is associated with a drop in global volatility during period (2), probably because tighter monetary policy indicates more stable
economic conditions. Note that, for all variables, the overidentification test fails to reject the null hypothesis at a 5% significance
level, and, thereby, fails to reject the identification assumption by Rigobon and Sack (2004). The exceptions are the coefficients on
the Global Volatility Index and on the euro-US-dollar exchange rate in period (1), which both do not feature a significant coefficient
estimate.
Our results for period (1) imply that none of the investigated financial assets in Table 2 features a significant coefficient, not even
at the 10% significance level. In period (2), the coefficients on the MSCI Index and the Stoxx 50 Index feature a significant and
positive coefficient, while the coefficients on these two indices are significant and negative during period (3). The coefficient on the
Stoxx Index (Banks) features a significant coefficient in period (3) only. Note that the coefficient estimate on Stoxx Index (Banks) is
7
This is equivalent to one percentage point.
8
negative in period (3). As period (2) roughly corresponds to the height of the Global Financial and European Sovereign Debt Crisis,
the results imply that a monetary policy tightening during this period was interpreted as a positive sign by financial markets: Equity
price indices increased in value. In contrast, a more expansionary monetary policy stance was interpreted as a sign that financial
market turbulence is not yet over. During period (3), a period of low inflation, low interest rates, and unconventional euro area
monetary policies, the coefficients on euro-area-wide equity price indices feature the more conventional negative sign: A monetary
policy tightening is associated with a lower value of stock prices indices, because some investors turn from equity to bonds, which
now offer a higher yield than previously.
Regarding the euro-US-dollar exchange rate, we identify a significant impact of euro area monetary policy in periods (2) and (3):
Restrictive monetary policy measures are associated with an appreciation of the euro vis-à-vis the US-dollar. Expansionary monetary
policy measures are associated with a depreciation of the euro vis-à-vis the US-dollar. Our estimation results suggest that the response
of the exchange rate increased over time: The coefficient estimate in period (3) equals more than three times the coefficient estimate
for period (2).
Tables 3 to 7 show the estimation results for specific financial asset classes in our sample of thirteen euro area economies and four
non-euro economies. The structure of the number columns in Tables 3 to 7 corresponds to the structure of the number columns in
Table 2. Table 3 shows the response of national stock price indices to monetary policy, for instance the response of the DAX in the
case of Germany, and of the CAC 40 in the case of France. Table 4 shows the response of the volatility indices derived from national
stock price indices as explained in Section 2. In Tables 3 and 4, a coefficient of 10 implies that a 100 basis point8 increase in the policy
instrument is systematically associated with an increase in the respective financial asset price by 10%. The following comparison
might be interesting. For the goods market, Peersman (2011) and Villa (2013) find that a one percentage point increase in our
monetary policy rate is associated with a median euro area output decrease of approximately 4.5% in the short run.
Using the same conservative measure for innovations in euro area monetary policy, the results presented in Tables 3 and 4
confirm the observation from the previous paragraph that stock price indices are more likely to feature a significant coefficient in
period (3) compared to period (1). This is true both for euro area economies, which were particularly affected by the Global Financial
and Sovereign Debt Crises, and for euro area economies, which were less affected by these crises. Regarding the stock price indices of
Eastern European economies, we do not systematically find significant responses of stock markets to euro area monetary policy: The
coefficients on equity price indices are significant and positive in Poland in period (2), and significant and negative in the Czech
Republic in period (3); however, they are significant only at a 10% significance level. Note that all coefficients for the Slovak Republic
are insignificant, while the coefficient on the Slovenian SBI Top (equity) Index is significant and positive in period (3). We do not find
a significant impact of euro area monetary policy on volatility indices in any investigated country, except for Bulgaria in period (2),
i.e., during the height of the Global Financial and Sovereign Debt Crises. Here, tighter monetary policy was associated with a
volatility increase in the main Bulgarian stock index. Estimation results based on the robustness specification of policy announcement
dates confirm size and significance of the coefficient.
Tables 5, 6, and 7 show the response of short-term, medium-term, and long-term government bonds, respectively. In Tables 5, 6,
and 7, a coefficient of 100 implies that a 100 basis point increase in the policy instrument is systematically associated with an
increase in the respective financial asset yield by 100 basis points.
Table 5 lists the coefficient estimates for short-term government bonds. We do not find any significant coefficient in period (1). In
period (2), we find significant and positive coefficients for Belgium, Finland, France, and Italy. In these economies, an announced
tighter monetary policy increases short-term government bond yields. In period (3), the coefficients for these economies remain
significant, and typically increase in magnitude. Further, the coefficients for Austria and Spain become significant and positive. The
coefficients for Germany and the Netherlands remain insignificant, potentially due to the fact that German and Dutch short-term
government bond yields have been very close to zero in recent years. Interestingly, the coefficient for the Slovak Republic becomes
significant and negative in period (3).
Table 6 lists the coefficient estimates on medium-term government bonds. Again, most investigated economies do not feature a
significant coefficient in period (1). The exception is Austria, where we find a significant and positive coefficient. In periods (2) and
(3), many euro area economies feature significant coefficients. This is true for economies which were particularly affected by the
Global Financial and Sovereign Debt Crises, and for economies, which were less strongly affected. If both the coefficients in period (2)
and period (3) are significant, the coefficient in period (3) is larger in magnitude. However, Austria and the Netherlands feature a
significant and positive coefficient in period (2) but do not feature a significant coefficient in period (3), whereas Spain does not
feature a significant coefficient in period (2). Note that we only find weak evidence for spillover effects to Eastern European
economies, which may be because we use a conservative measure for the euro area monetary policy shock. We do find significant
coefficients for the Czech Republic in period (2), i.e., at the height of the Global Financial and Sovereign Debt Crises. At this time, the
Czech currency was not pegged to the euro. Note that we also find significant coefficients during period (1) and (2) in Poland, which
has a floating exchange rate regime vis-à-vis the euro. The Eastern euro area members Slovak Republic and Slovenia do not feature
significant coefficients in any period. The coefficients for Greece and Portugal are not significant, although they experienced a strong
economic downturn and may have benefitted strongly from monetary policy. However, for these economies, it appears as if fiscal
policy measures and reforms may have played a stronger role than monetary policy measures.
Table 7 lists the coefficient estimates for long-term government bonds. With the exception of Austria, we do not find any sig-
nificant coefficients during period (1). Many euro area and non-euro economies feature a significant and positive coefficient in period
8
This is equivalent to one percentage point.
9
Table 3
Estimation results for national stock price indices.
Country Measure Period (1) Period (2) Period (3)
Particularly affected euro area economies

Greece Monetary policy impact −3.26 6.64 −39.96***
(0.46) (0.34) (0.00)
Ireland Monetary policy impact −6.28 −12.37 −30.99***
(0.43) (0.29) (0.00)
Italy Monetary policy impact −127.82 −9.66 −43.23***
(0.17) (0.39) (0.00)
Portugal Monetary policy impact 1.02 −2.20 −15.73
(0.85) (0.73) (0.24)
Spain Monetary policy impact 0.39 −0.11 −38.93***
(0.94) (0.25) (0.00)
Eastern European euro and non-euro economies

Bulgaria Monetary policy impact 0.81 19.48
(0.80) (0.31)
Overidentif. test 0.55 0.02
Czech Republic Monetary policy impact 7.03 1.45 −12.61*
(0.58) (0.91) (0.06)
Hungary Monetary policy impact −0.58 8.88 −8.12
(0.97) (0.27) (0.33)
Poland Monetary policy impact 8.75 10.50* −6.98
(0.54) (0.06) (0.67)
Slovak Republic Monetary policy impact 10.63 −9.28
(0.34) (0.18)
Slovenia Monetary policy impact −44.99 183.96***
(0.15) (0.00)
Other euro area economies

Austria Monetary policy impact −3.02 10.32 −24.16***
(0.60) (0.26) (0.00)
Belgium Monetary policy impact −156.48 7.28 −30.72***
(0.28) (0.16) (0.00)
Finland Monetary policy impact −1.00 −4.46 −33.99***
(0.94) (0.61) (0.00)
France Monetary policy impact 32.18 −1.18 91.48**
(0.84) (0.24) (0.03)
Germany Monetary policy impact −85.27 1.47 −44.88***
(0.44) (0.88) (0.00)
Netherlands Monetary policy impact −1.05 −1.19 66.74**
(0.53) (0.21) (0.03)
This table lists for each national stock market index the estimated impact of euro area monetary policy based on the GMM approach by Rigobon and
Sack (2004), the p-value associated with each point estimate (in parenthesis), and the p-value associated with an overidentification test based on one
additional moment condition. In the latter case, failure to reject the null is consistent with valid identification assumptions. Period (1) refers to Jan.
2000 to Dec. 2006, Period (2) refers to Jan. 2007 to Dec. 2012, and Period (3) refers to Jan. 2013 to Oct. 2018.
(2) or (3). Indeed, the coefficients of all euro area economies but Slovenia are significant and positive in either period (2) or period
(3). Where the coefficients are significant in both period (2) and period (3), the coefficient in period (3) is typically larger in
magnitude. For Slovenia and non-euro economy Hungary, we do not find any significant coefficient in either period (1), period (2), or
period (3).
Overall, Tables 5 to 7 suggest that euro area monetary policy announcements have a stronger impact in periods (2) and (3) than in
10
Table 4
Estimation results for volatility indices.

Greece Monetary policy impact 9.55 2.21 27.73
(0.65) (0.92) (0.47)
Ireland Monetary policy impact 659.67 12.26 21.52
(0.12) (0.67) (0.56)
Italy Monetary policy impact 778.27 15.40 5.50
(1.00) (0.56) (0.88)
Portugal Monetary policy impact 3.33 19.65 −21.85
(0.90) (0.41) (0.51)
Spain Monetary policy impact −23.73 27.04 27.65
(0.19) (0.23) (0.48)

Bulgaria Monetary policy impact 90.47** 25.50
(0.02) (0.67)
Czech Republic Monetary policy impact 31.90 −31.24 32.72
(0.33) (0.28) (0.59)
Hungary Monetary policy impact −27.14 −2.61 −5.02
(0.52) (0.88) (0.92)
Poland Monetary policy impact 21.40 12.13 −121.13
(0.21) (0.69) (0.18)
Slovak Republic Monetary policy impact 55.29 −1.02
(0.12) (0.98)
Slovenia Monetary policy impact −26.74 284.68
(0.76) (0.42)

Austria Monetary policy impact 103.96 −13.02 13.87
(0.22) (0.62) (0.75)
Belgium Monetary policy impact 41.68 1.85 13.00
(0.39) (0.94) (0.78)
Finland Monetary policy impact −32.02 −1.90 −3.12
(0.18) (0.93) (0.94)
France Monetary policy impact 0.02 23.22 −94.92
(1.00) (0.44) (0.27)
Germany Monetary policy impact 8.94 8.04 −59.80
(0.77) (0.76) (0.36)
Netherlands Monetary policy impact −21.84 −33.33 −68.98
(0.56) (0.19) (0.23)
This table lists for each national volatility index the estimated impact of euro area monetary policy based on the GMM approach by Rigobon and
period (1). This is true for euro area economies, which were particularly affected by the Global Financial and Sovereign Debt Crises,
as well as for euro area economies, which were less directly affected by these crises.
While the responses of the medium-term government bond yields are stronger in magnitude than the responses of short-term
government bond yields, the responses of long-term government bond yields are not necessarily stronger than the responses of
medium-term government bond yields. Indeed, the reverse is true in most cases: Where both responses are significant, the magnitude
11
Table 5
Estimation results for short-term government bonds.

Greece Monetary policy impact
Overidentif. test
Ireland Monetary policy impact 87.77 106.40 69.81
(0.25) (0.34) (0.37)
Italy Monetary policy impact 13.39 75.65* 236.63***
(0.78) (0.07) (0.00)
Portugal Monetary policy impact 16.41 118.64 −73.90
(0.71) (0.17) (0.51)
Spain Monetary policy impact 6.79 16.08 147.12***
(0.75) (0.77) (0.01)

Bulgaria Monetary policy impact −45.58 −155.13
(0.79) (0.55)
Czech Republic Monetary policy impact 13.44 43.02 −0.80
(0.74) (0.25) (0.97)
Hungary Monetary policy impact −16.43 −73.55 60.54
(0.60) (0.15) (0.29)
Poland Monetary policy impact −4.73 −35.30 82.30
(0.77) (0.32) (0.35)
Slovak Republic Monetary policy impact −609.87 −609.34**
(0.25) (0.03)
Slovenia Monetary policy impact 457.69 14,925.00
(0.20) (1.00)

Austria Monetary policy impact −57.39 52.13 128.35***
(0.46) (0.31) (0.00)
Belgium Monetary policy impact 7.52 134.88*** 105.44***
(0.49) (0.00) (0.00)
Finland Monetary policy impact 26.42 42.36* 165.52***
(0.57) (0.08) (0.00)
France Monetary policy impact 61.43 63.16** 103.91***
(0.26) (0.02) (0.00)
Germany Monetary policy impact −624.17 −11.04 −126.45
(1.00) (0.77) (0.52)
Netherlands Monetary policy impact 4.88 39.06 −71.05
(0.91) (0.14) (0.65)
This table lists for each short-term govt. bond the estimated impact of euro area monetary policy based on the GMM approach by Rigobon and Sack
(2004), the p-value associated with each point estimate (in parenthesis), and the p-value associated with an overidentification test based on one
of the coefficient on medium-term government bond yields is larger than the magnitude of the coefficient on long-term government
bond yields. This implies in the context of a monetary policy tightening, that financial market participants expect a partial reversal of
this policy in the long-term; a reversal which translates to proportionally lower increases in long-term bond yields compared to
increases in medium-term yields. The exceptions are Ireland and Spain in period 3: Here, long-term government bond yields feature a
larger coefficient than medium-term government bond yields. This may indicate that financial market participants in these markets
12
Table 6
Estimation results for medium-term government bonds.

Greece Monetary policy impact −1.13 −51.75 55.59
(0.80) (0.63) (0.68)
Ireland Monetary policy impact −6.71 156.75** 183.02***
(0.87) (0.02) (0.00)
Italy Monetary policy impact 9.64 105.21** 292.05***
(1.00) (0.03) (0.00)
Portugal Monetary policy impact 34.10 117.49 100.72
(0.36) (0.87) (0.29)
(0.19) (0.49) (0.00)

Bulgaria Monetary policy impact 21.95 183.08
(0.81) (0.48)
Czech Republic Monetary policy impact 11.60 124.60*** 24.26
(0.44) (0.00) (0.39)
Hungary Monetary policy impact −10.06 0.17 51.97
(0.76) (1.00) (0.26)
Poland Monetary policy impact −26.60* 46.03* 31.04
(0.07) (0.08) (0.82)
Slovak Republic Monetary policy impact −111.30 60.32
(0.33) (0.28)
Slovenia Monetary policy impact −260.38 123.18
(0.35) (0.63)

Austria Monetary policy impact 170.73*** 93.74*** −1950.30
(0.00) (0.00) (1.00)
Belgium Monetary policy impact 53.77 55.12 69.24
(0.23) (0.12) (0.30)
Finland Monetary policy impact 24.65 62.36** 205.02***
(0.57) (0.04) (0.00)
France Monetary policy impact 41.01 86.15*** 239.34***
(0.33) (0.01) (0.00)
Germany Monetary policy impact 61.30 73.77** 204.50***
(0.41) (0.02) (0.00)
Netherlands Monetary policy impact 25.15 51.43** −0.16
(0.71) (0.05) (1.00)
This table lists for each medium-term govt. bond the estimated impact of euro area monetary policy based on the GMM approach by Rigobon and
***, **, and * indicate significance of the estimated coefficients at 1%, 5%, and 10% level, respectively.
expect that a monetary policy reversal will not occur within the next ten years or that a monetary policy reversal will not translate to
lower long-term government bond yields in these economies.
The coefficients based on the event study approach confirm both the sign and the magnitude of the coefficient estimates based on
the GMM approach. Further, they confirm the previously observed stronger impact of monetary policy communication over time.
Focusing on significant coefficients on government bond yields, our results suggest that the magnitude of the short-term
13
Table 7
Estimation results for long-term government bonds.

Greece Monetary policy impact 2.68 −158.30 345.28***
(0.84) (0.22) (0.00)
Ireland Monetary policy impact −0.11 48.00 187.83***
(1.00) (0.32) (0.00)
Italy Monetary policy impact 14.98 80.15** 260.65***
(0.61) (0.02) (0.00)
Portugal Monetary policy impact 1.12 74.09** 111.45
(0.97) (0.05) (0.34)
(0.45) (0.50) (0.00)

Bulgaria Monetary policy impact 80.52* −67.83
(0.10) (0.67)
Czech Republic Monetary policy impact −0.68 76.03*** 47.70
(0.97) (0.01) (0.20)
Hungary Monetary policy impact −5.51 38.14 54.03
(0.85) (0.64) (0.24)
Poland Monetary policy impact 16.38 43.31* 30.47
(0.29) (0.10) (0.81)
Slovak Republic Monetary policy impact 190.55* 152.14***
(0.07) (0.00)
Slovenia Monetary policy impact 280.43 240.15
(0.31) (1.00)

Austria Monetary policy impact 152.03** 48.07*** 180.63***
(0.04) (0.00) (0.00)
Belgium Monetary policy impact 36.33 49.00*** 201.10***
(0.43) (0.01) (0.00)
Finland Monetary policy impact 5.52 79.86** 191.07***
(0.87) (0.02) (0.00)
France Monetary policy impact 27.04 69.59*** 203.01***
(0.47) (0.00) (0.00)
Germany Monetary policy impact −8.20 54.72** 183.75***
(0.80) (0.02) (0.00)
Netherlands Monetary policy impact −11.50 52.19** 181.89***
(0.74) (0.03) (0.00)
This table lists for each long-term govt. bond the estimated impact of euro area monetary policy based on the GMM approach by Rigobon and Sack
(2004), the p-value associated with each point estimate (in parenthesis), and the p-value associated with an overidentification test based on one
14
government bond response to euro area monetary policy correlates strongly and positively with the magnitude of the medium-term
government bond response, but only weakly with the magnitude of the long-term government bond response. In the following two
paragraphs, we compute correlation coefficients based on the significant coefficients in Tables 5 to 7. The correlation coefficient
between short-term and medium-term government bond responses is 0.89 (based on seven observations, where both short-term and
medium-term yields featured a significant coefficient).9 The correlation coefficient between short-term and long-term government
bond responses is 0.18 (based on eleven observations, where both short-term and long-term yields featured a significant coeffi-
cient).10 Given that the ECB mostly targets inflation expectations in the short-term and the medium-term, this difference in corre-
lation coefficients is hardly surprising. Moreover, the results imply that market participants differentiate between asset classes and
maturities.
Further, again limiting the analysis to the behavior of significant coefficients on government bond yields, our results suggest that
in countries that were less affected by the Global Financial and Sovereign Debt Crises, the financial market impact of monetary policy
is reduced. Indeed, the correlation between the magnitude of medium-term government bond responses and average country-specific
and period-specific inflation rates equals −0.81 (based on 14 euro-area observations).11 The correlation between the magnitude of
long-term government bond responses and average inflation rates equals −0.79 (based on 21 euro-area observations).12 Moreover,
the magnitude of the long-term government bond response correlates positively and strongly with the country- and period-specific
average unemployment rate: The correlation coefficient equals 0.67 (based on the same 21 euro area observations as above). The
correlation coefficient between the response of medium-term government bond yields and average unemployment rates equals 0.51
(based on the same 14 euro area observations as above). Note, however, that the correlation coefficient between the response of
short-term government bond yields and average unemployment rates is close to zero and equals 0.02. In other words, in countries
where inflation rates were higher, i.e., that suffered less under prolonged low economic growth during and after the Global Financial
and Sovereign Debt Crises, the government bond yields feature below average responses to expansionary monetary policy. Corre-
spondingly, in countries where unemployment rates were lower, the government bond yields feature a below average response to
monetary policy.
These estimation results are in line with the theory on optimum currency areas. One central tenet of the optimum currency theory
is that within a currency area, the loss of monetary policy instruments at a country level may increase the adverse effects associated
with asymmetric economic shocks.13 This is especially true, when there is no fiscal union in place and tax revenue from prosperous
regions or countries is not redirected to afflicted regions or countries. This is the case for the euro area. Here, an asymmetric shock
may increase the observed losses in stock prices in national capital markets, because regional companies experience higher losses
than it is the case, when country-level monetary policy mitigated some of the adverse effects of the asymmetric shocks. If the
economic shock is large enough, a country's solvency may be questioned, increasing the country-specific risk premium in the bond
market. Moreover, it may be that the afflicted country has to leave the currency union in order to address the economic shock. This
adds devaluation risk, which will further increase national bond yields and interest rates. Overall, the absence of country-specific
monetary policy increases the interest rate difference between normal periods and periods of adverse economic shocks. When the
(common) monetary policy addresses the economic problems of the afflicted countries, the country-specific and devaluation risk
premia fall, while the risk premia in more prosperous members of the currency union should not increase. Monetary policy thereby
affects afflicted economies more strongly. Note that the evolution of country-specific and devaluation risk premia may not be in-
dependent of the economic outlook in other euro area economies. One key issue during the Sovereign Debt Crisis in 2012 regarded
the continued participation of Greece in the euro area, which depended on the solvency of the Greek government and ultimately on
long-term economic growth perspectives. If Greece had left the currency union, other economies might have followed, because their
country-specific devaluation risk premia would have increased due to the existence of a precedent, and refinancing costs of gov-
ernment debt would have increased even further. A vicious circle might have developed where expected devaluation is the main
cause for actual devaluation. As a consequence of potential correlation between financial market responses to euro area monetary
policy, the observed correlation between strength of financial market response and crisis severity measures may arise because
monetary policy communication was more effective in afflicted economies overall, or because monetary policy communication was
more effective in one afflicted economy, and this effectiveness spilled over to other afflicted economies.
5. Conclusions
In this paper, we explore whether the Global Financial Crisis and the introduction of unconventional monetary policy measures
has led to a change in the financial market impact of euro area monetary policy. Using a conservative measure of innovations in
monetary policy based on the heteroscedasticity-approach of Rigobon and Sack (2004), which biases our coefficient estimates to-
wards insignificance, we investigate the impact of ECB policy communication on national and euro-wide equity indices, derived
volatility indices, as well as on government bond yields.
Overall, we find that financial market participants have responded more strongly to monetary policy after the Global Financial
9
These observations refer to Finland, France, Italy, and Spain.
10
These observations refer to Austria, Belgium, Finland, France, Italy, Slovak Republic, and Spain.
11
These observations refer to Austria, France, Germany, Ireland, Italy, the Netherlands, and Spain.
12
These observations refer to Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, and Spain.
13
For more details, please consult Baldwin and Wyplosz (2015).
15
Crisis. More precisely, we draw this conclusion based on three observations: First, monetary policy has affected government bond
yields more strongly after the Global Financial Crisis. The responses of medium- and long-term government bond yields have been of
comparable magnitude, and stronger than the responses of short-term government bond yields. In line with the theory on optimum
currency areas, government bond yields have responded more strongly to monetary policy communication in economies that were
more severely affected by the Global Financial and Sovereign Debt Crises. Second, monetary policy has also affected equity price
indices more strongly after the Global Financial Crisis. Third, after the Global Financial Crisis, the euro has significantly depreciated
in response to expansionary monetary policy. We do not find a significant impact before the Global Financial Crisis.
Assuming that markets correctly interpret the economic consequences of macroeconomic shocks, the fact that asset prices have
shown a stronger response to innovations in monetary policy after the Global Financial and Sovereign Debt Crises suggests that
financial market participants nowadays respond more strongly to monetary policy communication. This phenomenon can be of
temporary or permanent nature. The phenomenon may be temporary, because it may be a result of exceptionally low interest rates in
the euro area: In response to the Sovereign Debt Crisis in 2012, the ECB lowered its policy rates effectively to zero, and has since kept
them at this level (article is dated June 2019). As Blinder et al. (2008) state, the importance of central bank communication increases
when policy rates are close to zero, because central banks cannot further lower policy rates. Instead, expected future policy rates, as
communicated by central bank press releases or speeches, determine the policy stance. When policy rates increase, the importance of
central bank communication may fall. Moreover, explanations supporting the temporary nature of an observed phenomenon may be
found in the increased uncertainty about how the ECB or national governments might address the divergence of economic growth
perspectives across euro area members (at least since 2012). This divergence in growth perspectives has temporarily focused at-
tention on government bond markets. Once market participants have learned how the ECB and national governments address these
issues, central bank communication events may create less news. Nevertheless, the phenomenon may also be permanent, because the
Global Financial and Sovereign Debt Crises have highlighted the need for a global lender of last resort in the presence of globalized
financial markets, and central banks have shown that they may be better-positioned to step into this role than national governments.
This may permanently increase the attention paid by financial market participants to central bank communication.
Appendix A. Data sources
Variable Source
Euro area policy instrument EURIBOR, 3-month, future: continuation month 1

Short-term government bond Thomson Reuters EIKON: 1-year government benchmark bond, exceptions are Finland, Germany, the Netherlands, Italy, Spain,
yield and Portugal, where we use the 2-year government benchmark bond missing for Greece
Medium-term government b- Thomson Reuters EIKON: 5-year government benchmark bond
ond yield
Long-term government bond Thomson Reuters EIKON: 10-year government benchmark bond
yield
Equity price index Thomson Reuters EIKON:
Austria: ATX
Belgium: BEL 20-Index
Bulgaria: SOFIX Index
Czech Republic: PX Prague SE Index
Finland: OMX Helsinki 25
France: CAC 40
Germany: DAX
Greece: Athex Composite Share Price Index
Hungary: Budapest Stock Index
Ireland: ISEQ Overall Index
Italy: FTSE/MIB
Netherlands: AEX-Index
Poland: WIG 20
Portugal: PSI 20
Slovenia: SBI Top Index
Slovak Republic: SAX Index
Spain: IBEX 35
National (historical) Volatility Based on closing prices of the leading national equity price index
Index Computed as annualized standard deviation observed in the previous 30 closing prices
365
Annualization factor:
30
Global volatility CBOE Volatility Index; Thomson Reuters EIKON
Euro/US spot exchange rate Thomson Reuters EIKON
Unemployment rate European Commission (2019)
Inflation rate European Commission (2019))
16
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Global Finance Journal: Franziska Collingro, Michael Frenkel

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Global Finance Journal

On the ﬁnancial market impact of euro area monetary policy: A

2. Data and expected ﬁnancial market impact

Fig. 1. Comparison of US Federal Reserve and ECB total assets.

amount of observed price changes on non-policy announcement days.

Global Volatility Index Monetary policy impact 106.70 −45.87* 31.98

Particularly aﬀected euro area economies

Eastern European euro and non-euro economies

Other euro area economies

Particularly aﬀected euro area economies

Eastern European euro and non-euro economies

Other euro area economies

Particularly aﬀected euro area economies

Eastern European euro and non-euro economies

Other euro area economies

Particularly aﬀected euro area economies

Eastern European euro and non-euro economies

Other euro area economies

Particularly aﬀected euro area economies

Eastern European euro and non-euro economies

Other euro area economies

Appendix A. Data sources

Euro area policy instrument EURIBOR, 3-month, future: continuation month 1

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