Unconventional monetary policy and inflation expectations in the Euro area. CEPS Working Document No 2020/01, January 2020

Asshoff, Sina and Belke, Ansgar and Osowski, Thomas (2020) Unconventional monetary policy and inflation expectations in the Euro area. CEPS Working Document No 2020/01, January 2020. [Working Paper]

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Abstract

With the ECB's policy rate having reached the zero lower bound, traditional monetary policy tools became ineffective and the ECB was forced to adopt a set of unconventional monetary policy (UMP) measures. This paper examines the effects of the ECB's UMP on inflation expectations in the Euro area as inflation expectations play a key role for achieving the inflation target of below, but close to 2%. Quantifying the impact of UMP is not straightforward, as standard empirical tools such as VAR cannot be applied. Hence, we use the Qual VAR approach pioneered by Dueker (2005) to overcome this problem. We indeed find that UMP leads to a rise in inflation expectations in the short run but that this effect appears to evaporate in the medium term. Our results put some doubt on the common claim that UMP has consistently contributed to a re-anchoring and a stabilisation of inflation expectations at the zero lower bound. Nevertheless, they indicate a rise in mediumterm real GDP growth triggered by UMP.

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