Smells Like Fiscal Policy? Assessing the Potential Effectiveness of the ECB's OMT Program

Nikolay Hristov, Oliver Hülsewig, Thomas Siemsen and Timo Wollmershäuser

No 4628, CESifo Working Paper Series from CESifo

Abstract: This paper explores the potential effectiveness of the ECB’s Outright Monetary Transaction (OMT) program in safeguarding an appropriate monetary policy transmission. Since the program aims at manipulating bank lending rates by conducting sovereign bond purchases on secondary markets, a stable relationship between bank lending rates and government bond rates is of prime importance. Using vector autoregressive models with time varying parameters (TVP–VAR) we evaluate the stability of this relationship by focusing on the reaction of bank lending rates to movements in government bond rates over the period 2003–2013. Our results suggest that the potential success of OMTs in restoring the monetary transmission mechanism is limited as the link between bank lending rates and government bond rates has substantially weakened since the end of 2008.

Keywords: European Central Bank; OMT program; time varying parameter vector autoregressive model; interest rate pass-through (search for similar items in EconPapers)
JEL-codes: E42 E43 E44 E58 E63 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Smells Like Fiscal Policy? Assessing the Potential Effectiveness of the ECB s OMT Program (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4628

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