The effects of the ECB’s balance sheet policies on inflation expectations

Abstract

Since the inception of the global financial crisis in 2008, the threat to price and financial stability forced the European Central Bank (ECB) to implement monetary policy responses that were unconventional in design, size and scope. The novelty of these non-standard measures has stimulated extensive research on their impact on the macro economy and the financial sector in particular, and on their effectiveness to mitigate the consequences of the crisis. Motivated by the recent deflationary episode within the Euro Area and the ECB’s continued involvement in an effort to maintain price stability, the aim of this dissertation is to examine the relationship between the ECB’s non-standard monetary policy measures and changes in inflation expectations during different phases of the recent crisis period. In this regard, the objective is to test the hypothesis that the implementation of these policies has had a positive effect on inflation expectations. Against the background of a lack of consensus on the precise definition of unconventional monetary policy, this study adopts the ECB’s balance sheet as a measure of the implemented unconventional policies, whilst inflation expectations are proxied by survey- and market-based measures at horizons ranging from 1-year to 10-years ahead. A two-part approach is adopted: a graphical analysis and a regression-based analysis. Whilst the former indicates a positive relationship, the regression estimation provides results which suggest that changes in the ECB’s balance sheet did not have a statistically significant effect on Euro Area inflation expectations at any horizon. Although not entirely inconsistent with the conclusions of several authors within the relevant literature, an extensive discussion of the limitations of the study provides further justification for these findings. Primarily, these relate to the nature of the research question and the methodological approach adopted. In view of this, a number of recommendations are put forward – primarily suggesting methodological refinements which may be the subject for further research.