Heterogeneous Effects of Unconventional Monetary Policy on the Bond Yields across the Euro Area

Abstract

This paper investigates the impact of European Central Bank's unconventional monetary policies between 2008-2016 on the government bond yields of eight European Monetary Union countries and up to eleven different maturities. In identifying this impact, it adopts a novel econometric approach that combines data-rich dynamic factor analysis and VAR with heteroskadasiticy based identification. This novel approach allows a single model to estimate the impact of a common unconventional monetary policy shock across different countries, maturities, yield components and over time. The results identify a significant and substantial impact for all countries and all maturities in the sample. The evidence also suggests that the impact was stronger and persistent in the periphery countries which have higher financial distress, uncertainty, country risk and lower liquidity. When we decompose the impact into separate yield components, we find that unconventional shocks decreased the common market component of the yields in all countries. As for the risk component, unconventional policies decreased it for the periphery countries permanently at the cost of a small increase in the core countries, as consistent with the international portfolio balance channel. These findings contribute to the literature by providing a comprehensive characterization of the impact of unconventional monetary policies for different economic environments.