Macroeconomic effects of the ECB'S forward guidance

This paper evaluates the macroeconomic effects of the European Central Bank's (ECB) forward guidance (FG) in the euro area and analyses its interaction with asset purchases. To that end, we employ a battery of structural vector autoregressions (VARs) with both constant and time-varying parameters and/or the error covariance matrix to explore the propagation of the FG shock over time and account for the changing nature of the ECB's FG. The FG shock is identified via traditional sign and zero restrictions of Arias et al. (Econometrica 86(2): 685-720, 2018), narrative sign restrictions of Antolin-Diaz and Rubio-Ramirez (Am Econ Rev 108(10):2802-2829, 2018) and high-frequency information approach akin to Andrade and Ferroni (J Monet Econ, 2020) and Jarocinski and Karadi (Am Econ J Macroecon 12(2):1-43, 2020). We find that the ECB's forward guidance on interest rates has been an effective policy tool as its announcement causing a 5 bps drop in interest rate expectations increases output by 0.09-0.12% and the price level by 0.035%. In addition, multiple evidence suggests that the introduction of the Asset Purchase Programme (APP) in 2015 considerably enhanced the credibility of FG. Regarding the transmission mechanism, we find that FG significantly lowered uncertainty in the euro area as well as borrowing costs for both households and firms.