The macroeconomic effects of ECB Asset Purchases at the ZLB in four major Euro Area countries (co-author Guido Bulligan)

In this paper we propose a nonlinear structural FAVAR model that is able to handle the ZLB on nominal interest rates in order to examine the impact of ECB asset purchases on macroeconomic and financial variables in the four largest economies of the Euro area. We find that they have an heterogeneous e ffect in stimulating real activity variables of the countries considered while they seem eff ective in increasing inflation in the Euro Area. The portfolio rebalancing and the bank lending channel are the main drivers for the transmission of ECB asset purchases shocks to the real economy while con fidence and the exchange rate channel seem to play a minor role instead. Furthermore we propose a new shadow rate for the EA that is estimated using information coming from both financial and macroeconomic variables and compare it with alternatives proposed in the literature. Finally we compute the the lift-off probability for the ECB monetary policy short-term interest rate (MRO) and find that, as of December 2015, the Euro Area would escape the ZLB trap in the second half of 2019.