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Macroeconomic effects of unconventional monetary policy & the ECB’s new stimulus package (Martin Ertl)

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Euro Area Shadow Rates

Macroeconomic effects of unconventional monetary policy

  • New monetary stimulus package lowers the deposit facility rate to -0.5 % and restarts QE at a monthly pace of 20 billion Euro (open ended).
  • Previous unconventional monetary policy has led to a rise in inflation by 0.6 %-age points.

  The European Central Bank provides additional monetary stimulus by lowering the interest rates further into negative territory and restarting net asset purchases (QE). The cut of the interest rate on the deposit facility by 10 basis points (bp), to -0.5 %, was widely expected. Part of the banks’ excess liquidity holdings will be exempt from negative deposit rates, introducing a two-tier system. The exempt tier, which is initially set at 6 times an institution’s minimum reserve requirements, is remunerated at an annual rate of 0 %. QE will start in November at a monthly pace of 20 billion Euro, which is not excessive, yet the length of the program is open ended. “The Governing Council expects [QE] to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before its starts raising the key ECB interest rates.” As the calendar-dependence of the forward guidance about ECB interest rates was removed from the Governing Council’s statement, there is no calendar-specific end to QE. Asked about the length of the QE program, Mario Draghi emphasized the state-dependence and that inflation will not only need to converge but also stabilize at below, but close to 2 %. “Projected inflation needs to rise considerably from current levels.” Further, the worsening economic outlook, has led the ECB to loosen the conditions of the third round of targeted longer-term refinancing operations (TLTRO III). The interest rate on TLTRO is reduced and can now be as low as the interest rate on the deposit facility, the maturity has been extended to three years.

The substantial stimulus package was justified by a marked slowdown of GDP growth, the persistent risk to the Euro Area economy and a moderate inflation outlook which is not consistent with the ECB’s price stability objective. The release of new ECB staff macroeconomic projections brought downward revisions both for GDP growth as well as inflation. According to ECB projections, the Euro Area economy will expand at a rate of 1.1 % in 2019, 1.2 % in 2020 and 1.4 % in 2021. Thus, the outlook for 2019 / 2020 has been lowered by 0.1 / 0.2 %-age points, while the projection for 2021 has not been changed. The inflation outlook has been lowered for the entire projection horizon. Headline HICP inflation is projected at 1.2 % in 2019, 1.0 % in 2020 and 1.5 % in 2021. The large downward revision in 2020 is also explained by energy prices, as projected core inflation has only been lowered to 1.2 %, from previously 1.4 %. Euro Area inflation is, thus, not projected to exceed 1.5 % at the end of the projection horizon, which is not in line with the ECB’s price stability objective (Figure 1). In spite of the stimulus package and lower projections, the risks to the outlook remain tilted to the downside as neither a hard Brexit nor the severity of the trade war is reflected. As the outlook worsens and negative side effects of unconventional monetary policy intensify, the Governing Council unanimously shared the opinion that fiscal policy should become the main instruments to support the business cycle. The recent recovery was mainly a result of monetary policy with not a lot of support from fiscal policy, the ECB states.

Assessing the implication of unconventional monetary policy has already been the focus of last week’s UNIQA Capital Markets Weekly, which focused on QE’s effects on interest rates [1]. In this week’s analysis, we take a closer look at the macroeconomic effects of unconventional monetary policy, particularly on economic growth and inflation.

Overall, a consensus has built that unconventional monetary policy had beneficial effects on macroeconomic variables such as GDP and inflation. As these effects are not readily observable and quite difficult to model, estimates come with some degree of uncertainty. Identification requires counterfactual scenarios of how the economy would have evolved in the absence of the introduction of unconventional monetary policy measures. By the way, unconventional monetary policy refers not only to QE but also to the use of forward guidance and negative interest rates [2]. The rationale behind forward guidance and QE is to widen monetary easing over the whole yield curve, thus lowering yields of assets with longer maturities. The result is a flattening of the yield curve, lower borrowing costs for households and firms, increased credit, a boost to aggregate demand and, thus, ultimately a rise in inflation and output (Dell’Ariccia, Rabanal and Sandri, 2018).

  A first step in evaluating the macroeconomic effects of unconventional monetary policy is to provide an estimate of the monetary policy stance once the central bank has reached the ZLB. Based on term structure models, so called shadow rates can be estimated which coincide with the policy rate in normal times but turn negative when the ZLB becomes binding. The concept has been suggested by Krippner (2015) who, among others, estimates a shadow rate for the Euro Area. Figure 2 plots two readily available shadow rates alongside the overnight EONIA, as a proxy for the effective key policy rate. Both estimates show a substantial loosening in the monetary policy stance since 2014 when the targeted longer-term refinancing operations (TLTRO) were announced. That unconventional monetary policy measures have pushed shadow rates into negative territory also holds for alternative, yet not publicly available, shadow rates, such as Lemke and Vladu (2016), which show a less pronounced decline. The level of shadow rates varies substantially with model assumptions, yet, the correlation among them remains high (> 0.9).

A useful method to limit measurement errors from various levels of shadow rates is to extract their common factor. Following this framework, Mouabbi and Sahuc (2019) implement a shadow rate in a macroeconomic model (dynamic stochastic general equilibrium model). Comparing the resulting paths of GDP growth and inflation to a counterfactual scenario in which the nominal interest rate is set to the EONIA rate allows them to assess the macroeconomic effects of unconventional monetary policy. Between Q1 2014 and Q2 2017 average GDP growth would have been 1.1 %-age points and average core inflation 0.6 %-age points below the observed values in the absence of unconventional monetary policy. Thus, their results suggest a sizable effect of unconventional monetary policy on output and inflation.

Until now, there exist only a few studies which evaluate the macroeconomic effects of unconventional monetary policy in the Euro Area (Table 1). ECB staff estimates show a cumulative effect of 1.9 % for GDP (level) and an annual effect of about 0.5 %-age points on inflation for the 2016-19 period (Hartmann and Smets, 2018). Looking at various studies, the effect on inflation is surprisingly consistent with an average effect of 0.6 %-age points.

Based on this early evidence, unconventional monetary policy seems to be an effective tool to stimulate the economy and lift inflation. It can, however, not be used indefinitely and might, therefore, be most powerful in preventing deflation rather than raising inflation from 1.5 % to below but close to 2.0 %, as in the current situation. Moreover, with limited experience of QE it is hard to assess to what extent the macroeconomic effects of unconventional monetary policy depend on the state of the economy and are subject to decreasing effectiveness. Further, unconventional monetary policy increases the role of macroprudential policy (regulation) to monitor and limit potential negative side effects on financial stability. How effective macroprudential policy is to prevent excessive risk taking and whether financial stability risk once become a binding constraint for conducting unconventional monetary policy is to be seen.

[1] UNIQA Capital Markets Weekly, New ECB QE and its effects on interest rates,  https://press-uniqagroup.com/News_Detail.aspx?id=90990&menueid=1704&l=english.

[2] Unconventional monetary policy measures are necessary when the key central bank interest rate has already been lowered to 0 %, the zero lower bound (ZLB), though the economy would require additional monetary stimulus.


Dell’Ariccia, G., Rabanal, P. and Sandri, D., (2018), Unconventional Monetary Policy in the Euro Area, Japan, and the United Kingdom, Journal of Economic Perspectives, 32:4, pp. 147-172.

Hartmann, P., and Smets, F., (2018), The first twenty years of the European Central Bank: monetary policy, ECB Working Paper Series, No 2219.

Hohberger, S., Priftis, R. and Vogel, L., (2018), The macroeconomic effeects of quantitative easing in the Euro Area. Evidence from an estimated DGSE model, Bank of Canada Staff Working Paper, No. 2018-11.

Krippner, L., (2015), Zero lower bound term structure modeling: A practitioner’s guide.

Lemke, W., and Vladu, A., (2016), Below the Zero Lower Bound. A Shadow-Rate Term Structure Model for the Euro Area, Discussion Paper 32/2016, Deutsche Bundesbank.

Mouabbi, S. and Sahuc, J.-G., (2019), Evaluating the Macroeconomic Effects of the ECB’s Unconventional Monetary Policies, Journal of Money, Credit and Banking, 51:1, pp. 831-858.


Martin Ertl Franz Xaver Zobl

Chief Economist Economist

UNIQA Capital Markets GmbH UNIQA Capital Markets GmbH




1. Euro Area Economic Outlook

2. Euro Area Shadow Rates

3. Macroeconomic effects of unconventional monetary policy

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Euro Area Economic Outlook

Euro Area Shadow Rates

Macroeconomic effects of unconventional monetary policy

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