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Central bank policies and financial markets: Lessons from the euro crisis

Author

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  • Mody, Ashoka
  • Nedeljkovic, Milan

Abstract

In a novel econometric framework, we identify differences and significant asymmetries in financial markets' responses to the European Central Bank (ECB)'s various policy interventions during the eurozone crisis. Dollar liquidity interventions reduced stress in bond markets and improved economic sentiment, as reflected in higher equity prices. In contrast, the ECB's euro liquidity provisions and monetary stimulus measures delivered modest results. In both these cases, government bond spreads typically did decline but the risk of large spread increases and equity losses also increased. Only the Outright Monetary Transactions (OMT) intervention had a substantial expansionary effect. The results emphasize the importance of unambiguous monetary policy for driving market expectations.

Suggested Citation

  • Mody, Ashoka & Nedeljkovic, Milan, 2024. "Central bank policies and financial markets: Lessons from the euro crisis," Journal of Banking & Finance, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:jbfina:v:158:y:2024:i:c:s0378426623002248
    DOI: 10.1016/j.jbankfin.2023.107033
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    More about this item

    Keywords

    Monetary policy; Euro crises; Uncertainty; Conditional quantiles; MCMC;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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