Macroeconomic Effects of the ECB's Forward Guidance

This paper empirically evaluates the macroeconomic effects of the European Central Bank's (ECB) forward guidance (FG) on the euro area economy and analyses its interaction with asset purchases. To that end, we employ a battery of structural vector autoregressions (SVARs) with both constant and time-varying parameters and/or the error covariance matrix to explore the propagation of the FG shock over time and account for the changing nature of the ECB's FG (Odyssean since July 2013, Delphic prior to that). The FG shock is identified via both traditional sign and zero restrictions of Arias et al. (2014) and narrative sign restrictions of Antolin-Diaz and Rubio-Ram?rez (2018) which allow us to incorporate additional information about the timing of the shock to sharpen the inference. We find that the ECB's FG on interest rates has been an effective policy tool as its announcement causing a 5 bps drop in interest rate expectations increases output by 0.09%–0.12% and the price level by 0.035%. In addition, multiple evidence suggests that the introduction of the expanded asset purchase programme (APP) in 2015 considerably enhanced the FG credibility. Regarding the transmission mechanism, we find that FG significantly lowered uncertainty in the euro area as well as borrowing costs for both households and firms.