Macroeconomic Effects of the European Central Bank’s Unconventional Monetary Policies on Central and Eastern European Countries: A Cointegration Approach

Abstract

In response to the 2008–09 financial crisis, major central banks employed unconventional monetary policy measures to address the problems of weak growth and the zero lower bound. While some central banks have tapered, or begun to taper, their policies, some measures are still in effect nearly a decade later. This paper examines the macroeconomic effects of unconventional monetary policy measures employed by the European Central Bank on Central and Eastern European countries from 2008–2017 in order to determine the significance of stabilization and spillover effects. Central and Eastern European countries, especially non-euro area members, are particularly relevant due to their high level of economic integration with the euro area and unique position for potential future membership. I estimate a panel vector autoregression in first differences on a panel of 11 such countries that includes both Eurozone and non-Eurozone members: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. The panel VAR estimations are supplemented with a vector error correction model for the subsample of non-Eurozone members with floating exchange rates and inflation-targeting monetary regimes. Using impulse response functions and forecast error variance decompositions, I find that the policies temporarily increase both output and prices, with a greater effect on output than on prices; the effects on interest rate and real effective exchange rates are less significant. The findings, which confirm those found by earlier studies in the literature, are robust to a number of checks and situated in a broader policy discussion regarding unconventional monetary policy effectiveness amidst increasing economic integration and interdependence in Europe.