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

Ashoka Mody, Milan Nedeljkovic

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

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 languageEnglish (US)
Article number107033
JournalJournal of Banking and Finance
Volume158
DOIs
StatePublished - Jan 2024

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Conditional quantiles
  • Euro crises
  • MCMC
  • Monetary policy
  • Uncertainty

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