The Aggregate and Country-Specific Effectiveness of ECB Policy: Evidence from an External Instruments VAR Approach

This paper studies the transmission of ECB policy, both at the aggregate euro-area level and the country level. We estimate a VAR model for the euro area in which monetary policy shocks are identified using an external instrument that reflects unexpected changes in the policy stance. For that purpose, we use changes in German bunds at meeting days of the Governing Council and selected intermeeting announcements. We also decompose policy shocks into pure policy surprises and information shocks. The resulting impulse responses are robust with respect to the choice of the instrument. Expansionary monetary policy affects prices and real activity but remains ineffective in pushing credit and stock markets. We show that pure policy shocks, i.e., shocks net of the new information revealed on meeting days, also have a significant effect on credit and stock prices. The identified monetary policy shock is then put into country-specific local projections in order to derive country-specific impulse responses. The transmission is heterogeneous across member countries with credit and financial markets being unevenly affected by monetary policy.