Measuring the Signaling Effect of the ECB’s Asset Purchase Programme at the Effective Lower Bound

This paper analyses the signaling effect of the European Central Bank’s (ECB) statements related to its asset purchase programme (APP) on market expectations for the future path of short-term interest rates in the euro area. Considering a broad set of event days and daily changes in euro area stock indices as surprise reactions to the statements, an event-study analysis is employed to capture the changes in country-specific short-term interest rate expectations, as extracted from an effective lower bound (ELB) consistent shadow-rate term structure model. The empirical results generally support the presence of signaling effects in the euro area, but the estimated effectiveness of the channel has a considerable degree of uncertainty. Regarding country-specific differences, the reaction of interest rate expectations in the periphery countries tends to be stronger for dovish APP statement surprises, and thus these countries may benefit more from the signaling channel. Lastly, the responses of interest rate expectations to APP statement surprises are found to vary considerably depending on the identification strategy of the APP statements, which ultimately shows that these conclusions based on the empirical results are likely to be fragile.