Monetary Policy and Economic Expectations

Abstract

Economists have long recognized that adverse shocks to the nancial sector can have signi cant e ects on the real economy. The chance that nancial instability will lead to macroeconomic instability is often termed \systemic risk" and the bankruptcy of Lehman Brothers and the global crisis in the last decades represent near evidence. Historically, monetary authorities used to respond to global crisis by cutting interest rates to lower levels. However, when the short-term nominal interest rate reaches the zero lower bound, monetary policy loses the power to cut the interest rate to counterbalance the negative e ect of nancial crisis and to control the in ation rate in the economy. Motivating by the events of the nancial crisis in 2008, I study the e ect of nancial instability on the economy and the in uence of the Central Bank' unconventional monetary policy on market micro-structure. This work is divided in two main parts. In the rst chapter, I investigate the e ects of a nancial instability shock on consumption and business expectations using the \Announcements" of the European Central Bank in favor of stability as source of exogenous variation. Using quarterly data on the European countries, I show that a nancial instability shock depresses the aggregate expectations on investment while the e ects are mixed for aggregate consumption con dence. These results are robust to di erent identi cation schemes and several estimation methodologies. Finally, I estimate an impulse response function for a nancial instability shock on consumption and investment con dence using local projection on a 20 period horizon. The second chapter aims at assessing the impact of the unconventional monetary policy undertaken by the European Central Bank (ECB) on European corporate bond prices and their liquidity. Using a di erence-in-di erence estimation technique, I nd that the Corporate Sector Purchase Programme (CSPP) has signi cantly reduced both the yield and bid-ask spread of the purchased bonds. I also investigate whether the average treatment e ect has changed over time during the implementation of the policy: the e ect of the program on yield and prices has marginally abated, while the positive e ect on liquidity is still present approximately nine months after the policy inception. [edited by author]