Balance Sheet Policies in a Large Currency Union: A Primer on ECB Non-Standard Measures since 2014

Throughout the euro area crisis, the ECB broadened the scope of its instruments and enacted a series of non-standard measures to address financial fragmentation across jurisdictions and restore an appropriate degree of policy accommodation. The transmission of these measures through the currency union depends on the financial structure prevailing in various regions. This paper explores the country-specific macroeconomic transmission of selected non-standard measures from the ECB using a global DSGE model with a rich financial sector: we use the six-region multi-country model of Darracq Pariès and Papadopoulou [2019] to evaluate the macroeconomic effects of asset purchase programmes as well as credit easing measures taken by the ECB since 2014. The model accounts for credit and exchange rate channels of non-standard monetary policy measures. We show that the domestic transmission of the APP through the credit intermediation chain is significant and quite heterogenous across the largest euro area countries. The introduction of global portfolio frictions on euro area government bond holdings by international investors opens up for a larger depreciation of the euro which turns out to reinforce the macroeconomic propagation and narrow down the cross-country heterogeneity of the impacts.