Country-Level Effects of the ECB's Expanded Asset Purchase Programme

This paper evaluates the macroeconomic effects of the European Central Bank's (ECB) expanded asset purchase programme (APP) on Latvia and other euro area countries and investigates the cross-border transmission mechanism. To that end, we employ two different vector autoregressive (VAR) models often used to evaluate the spillovers stemming from the monetary policy actions, namely a bilateral structural VAR with block exogeneity (BSVAR-BE) and a multi-country mixed cross-section global VAR with stochastic volatility (MCS-BGVAR-SV), both estimated using Bayesian techniques. We find that the APP had a limited and weakly significant impact on Latvia's output and that most of the effect was generated by spillovers from other countries. However, we provide evidence that the APP had a robust impact on Latvian inflation due to depreciation of the euro. Regarding other jurisdictions, our results suggest that the ECB's asset purchases had a larger impact on industrial production in the countries where the portfolio rebalancing channel was activated. Despite that, our evidence suggests that the APP was mainly transmitted to inflation via exchange rate depreciation rather than through aggregate demand-driven shifts in the Phillips curve.