Do ECB's Monetary Policies Benefit EMEs? A GVAR Analysis on the Global Financial and Sovereign Debt Crises and Postcrises Period*
| Published date | 01 April 2021 |
| Date | 01 April 2021 |
| DOI | http://doi.org/10.1111/obes.12403 |
| Author | Andrea Colabella |
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©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 83, 2 (2021) 0305–9049
doi: 10.1111/obes.12403
Do ECB’s Monetary Policies Benefit EMEs? A GVAR
Analysis on the Global Financial and Sovereign Debt
Crises and Postcrises Period*
Andrea Colabella
Directorate General for Economics, Statistics and Research, Bank of Italy, via Nazionale
91, Rome 00184, Italy (e-mail: andrea.colabella@bancaditalia.it)
Abstract
This paper studies the spillover effects of the ECB’s monetary policies on non-euro area
countries, using a GVAR methodology, shadow rate for advanced economies (Wu and
Xia, 2016) and shock identification through Cholesky decomposition. A euro-area shadow
interest rate hike triggers a broad-based decline in output abroad, especially in Central,
Eastern and South-Eastern European (CESEE) economies, and a less widespread increase
in short-term interest rates. How countries respond to the shock depends on their charac-
teristics: the spillover effects are transmitted mainly through the trade channel, while the
short-term interest rate channel plays a limited role. Results are robust to different model
specifications.
I. Introduction
In recent years, central banks in advanced economies have implemented standard and
non-standard monetary policies to counter the effects of the crises that have hit the global
economy over the last decade. Given the euro area’s stake in the world economy, and
even more so from a regional perspective,many analyses have focused on the international
effects of the ECB’s non-standard monetary policy, particularly as regard financial markets
(Fratzscher, Lo Duca and Straub, 2014; Falagiarda,McQuade and Tirp´ak, 2015; Georgiadis
and Gr¨ab, 2015; Ciarlone and Colabella, 2016); more recently, studies on the real economy
have come to the fore (Bluwstein and Canova, 2016; H ´ajek and Horv´ath, 2017; Potjagailo,
2017; Beneck´a, Fadejeva and Feldkircher, 2018; Feldkircher, Gruber and Huber, 2020).
JEL Classification numbers: C32, E32, E52, E58, F41.
*I would like to thank the participants of the Bank of Albania’s 12th South-Eastern European Economic Research
Workshop, Tirana, 6–7 December 2018, the Oesterreichische Nationalbank’s 4th CESEEnet Research Workshop,
Mauerbach/Vienna,25–27 March 2019, three anonymous referees, Ambrogio Cesa-Bianchi, Emidio Cocozza, Martin
Feldkircher, Alessandro Galesi, Pietro Catte, Marco Flaccadoro, Giorgio Merlonghi, Carlo Pizzinelli andVanessa
L. Smith for their helpful comments and suggestions. Part of this work was undertaken when I was visiting the
Department of Economics at the University of Oxford, whose kind hospitality is gratefully acknowledged.The views
expressed in this paper are those of the author alone and do not necessarily reflect the views of the Bank of Italy. All
remaining errors are my own.
Do ECB’sMonetary Policies Benefit CESEE? 473
This paper aims to contribute to this growing stream of literature, focusing mostly (but
not exclusively) on the effects of the ECB’s non-standard monetary policies on CESEE
economies, in consideration of their high degree of trade and financial integration with the
euro area.
To accomplish our task, we use a Global VectorialAutoregressive (GVAR) model cov-
ering major advanced and emerging market countries, in addition to CESEE economies.
This allows us to account for complex interlinkages between different countries and re-
gions in the world, avoiding the ‘curse of dimensionality’ problems that usually mark
multi-country models. We build a new data set for 32 countries, mostly drawing from the
IMF International Financial Statistics database on GDP, inflation, short-term interest rates
and exchange rates (vis-`a-vis the euro). The ECB’s monetary policy measures are approx-
imated by Wu and Xia’s (2016) shadow policy rate, specifically designed to take account
of conventional and unconventional monetary policies, while not being constrained by the
zero lower bound (ZLB).
In the early GVAR literature, shock identification did not take centre stage, but rather
gave way to shock propagation analysis; however, more recent studies have addressed the
issue through the use of Cholesky decomposition (IMF, 2016) and zero and sign restrictions
(Georgiadis, 2015; Beneck´a et al., 2018; Burriel and Galesi, 2018; Feldkircheret al., 2020).
In line with this literature we implement Cholesky decomposition, which is applied onlyto
the euro area, to strike a balance between the need for clear-cut identification of the shock
and the desire to keep things as simple as possible.
Our main results show that a contractionary monetary policy shock in the euro area
brings about a broad-based and persistent decline in output in the euro area and abroad,
especially in CESEE economies. Moreover, the increase in the euro-area shadow interest
rate is transmitted to the short-term interest rates of a number of other countries, although
such increases are short-lived and not as widespread as GDP spillovers.
Against this background, we check whether the transmission of the spillover occurs
through a trade and/or a short-term interest rate channel, an exercise seldom performed in
the GVAR literature. Focusing on CESEE economies, we find that country characteristics
have a significant bearing on which channel prevails. We classify countries according to
their degree of trade and financial openness (high and low) and to their type of exchange
rate regime (vis-`a-vis the euro), that is, countries with some form of peg to the euro and
those without, checking whether the relative importance of the two channels varies along
these dimensions. First, we find that in CESEE economies with high-trade openness, the
external demand effect of the trade channel appears to be at work – implying a positive
co-movement between GDP in the euro area and that of its neighbouring countries – a
likely consequence of weaker external demand reflecting the larger export share of such
countries. Second, we find the existence of a consumption switching effect, that is the
negative co-movement between the euro-area GDP and that of its neighbours, which is
triggered by the depreciation of the domestic currency vis-`a-vis the euro or the limited
transmission of the euro-area short-term interest rate increase. This effect partly offsets the
demand absorption channel, and appears to be present in countries with flexible exchange
rate regimes vis-`a-vis the euro or with low financial openness. Third, differences in the
degree of financial integration point to the role of the short-term interest rate channel in
CESEE economies: in fact, this channel operates only for those countries that are highly
©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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