IMF Working Papers

ECB Spillovers to Emerging Europe: The Past and Current Experience

By Philipp Engler, Gianluigi Ferrucci, Pawel Zabczyk, Tianxiao Zheng

August 9, 2024

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Philipp Engler, Gianluigi Ferrucci, Pawel Zabczyk, and Tianxiao Zheng. ECB Spillovers to Emerging Europe: The Past and Current Experience, (USA: International Monetary Fund, 2024) accessed September 27, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We provide new evidence on the spillover effects of ECB monetary policy shocks to emerging European economies, using a combination of empirical methods and model-based simulations and focusing on spillovers from interest rate and balance sheet policies implemented by the ECB. We consider an event study set around the ECB policy announcement in June 2022 and also use local projections to estimate regional spillovers in a panel of 16 Emerging European countries spanning 1999 to 2022. Identifying ECB monetary policy shocks as the unexplained component of changes in the three-month Euribor futures rate, we find that ECB monetary policy tightening induces more than one-for-one changes in government bond yields in Emerging Europe, as well as sizable increases in sovereign spreads, domestic currency depreciations, and significantly lower output. Model simulations using a two-country DSGE calibrated to the euro area and its Eastern European neighbors reveal that a conventional tightening, achieved through interest rate increases, provides a more favorable inflation-output trade-off compared to balance sheet tightenings. The extent of spillovers from quantitative tightening depends on the speed of balance sheet reduction, and it is larger under a fixed exchange rate regime.

Subject: Central bank policy rate, Exchange rate arrangements, Exchange rates, Financial sector policy and analysis, Financial services, Foreign exchange, Monetary policy, Monetary tightening, Spillovers

Keywords: Central bank policy rate, Eastern Europe, ECB asset purchase portfolio, ECB monetary policy shock, ECB monetary policy tightening, ECB policy announcement, ECB spillover, Europe, Exchange rate arrangements, Exchange rates, Global, International Spillovers, Monetary Policy, Monetary policy spillover, Monetary tightening, Quantitative Easing, Spillovers

Publication Details

  • Pages:

    32

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2024/170

  • Stock No:

    WPIEA2024170

  • ISBN:

    9798400284540

  • ISSN:

    1018-5941

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