Macroeconomic effects of monetary policy shocks in the euro area and of the exit from the zero interest rate environment

Current research on US monetary policy shocks has improved identification of these shocks considerably. Research on euro area monetary policy has not yet incorporated these methodological advancements; identification is either weak or based on strong assumptions. We adopt the new approaches and sharpen inference on the macroeconomic and financial market effects of ECB monetary policy. In a first step, vector autoregressive models are estimated with Bayesian methods and monetary policy shocks are identified by means of sign restrictions. In a next step, identification is strengthened along two recently proposed dimensions: first, by applying sign restrictions also to the systematic component of monetary policy (Arias et al., 2016) and secondly, by exploiting narrative information on large reduced-form residuals (Antolin-Diaz & Rubio-Ramirez, 2016). We will not only estimate models for the euro area as a whole, but also for small euro area countries, including Austria. By employing a block exogenous framework, we duly take into account the specificity of the euro area as a monetary union of sovereign countries. We will not only present sample-averaged results by means of impulse response analysis and forecast error variance decompositions, but we will focus in particular on time series ("historical") decompositions. We will also apply them to new data in order to quantify in a timely manner the effects of the exit from the zero interest rate environment, which is to be expected over the project horizon.