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

Ashoka Mody; Milan Nedeljkovic

doi:10.1016/j.jbankfin.2023.107033

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

Ashoka Mody, Milan Nedeljkovic

Princeton School of Public and International Affairs

Princeton University

Research output: Contribution to journal › Article › peer-review

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.

Original language	American English
Article number	107033
Journal	Journal of Banking and Finance
Volume	158
DOIs	https://doi.org/10.1016/j.jbankfin.2023.107033
State	Published - Jan 2024

ASJC Scopus subject areas

Finance
Economics and Econometrics

Keywords

Conditional quantiles
Euro crises
MCMC
Monetary policy
Uncertainty

Access to Document

10.1016/j.jbankfin.2023.107033

Cite this

@article{c233a08e06664946a99d13715b95e88b,

title = "Central bank policies and financial markets: Lessons from the euro crisis",

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.",

keywords = "Conditional quantiles, Euro crises, MCMC, Monetary policy, Uncertainty",

author = "Ashoka Mody and Milan Nedeljkovic",

note = "Publisher Copyright: {\textcopyright} 2023 Elsevier B.V.",

year = "2024",

month = jan,

doi = "10.1016/j.jbankfin.2023.107033",

language = "American English",

volume = "158",

journal = "Journal of Banking and Finance",

issn = "0378-4266",

publisher = "Elsevier",

}

TY - JOUR

T1 - Central bank policies and financial markets

T2 - Lessons from the euro crisis

AU - Mody, Ashoka

AU - Nedeljkovic, Milan

PY - 2024/1

Y1 - 2024/1

N2 - 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.

AB - 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.

KW - Conditional quantiles

KW - Euro crises

KW - MCMC

KW - Monetary policy

KW - Uncertainty

UR - http://www.scopus.com/inward/record.url?scp=85177788509&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85177788509&partnerID=8YFLogxK

U2 - 10.1016/j.jbankfin.2023.107033

DO - 10.1016/j.jbankfin.2023.107033

M3 - Article

SN - 0378-4266

VL - 158

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

M1 - 107033

ER -

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

Abstract

ASJC Scopus subject areas

Keywords

Access to Document

Other files and links

Fingerprint

Cite this