The ECB’s Quantitative Easing during the Covid-19 pandemic: The Importance of Information Shocks
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2022-07-15
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en
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This thesis examines how effective the European Central Bank’s Quantitative Easing (QE) policy has been in stimulating the economy during the Covid-19 pandemic by considering stock prices. While economic theory suggests that QE positively affects stock prices through lower interest rates, the empirical evidence is ambiguous. I measure QE by first identifying a distinctive QE shock, which I then decompose into two shocks with asymmetric effects: A pure policy shock that increases stock prices, and an information shock that harms stock prices. Combining these two methods provides a complete picture of QE by specifically capturing QE and accounting for how QE is interpreted by market participants. I find that information shocks dominate pure policy shocks during the Covid-19 period, leading QE to not only be ineffective but to negatively affect the economy. This suggests that market participants interpreted announcements about QE during the pandemic as a mere indicator of the state of the economy, rather than announcements about expansionary measures to stimulate the economy. This implicates that central banks should carefully assess how they announce QE policies during times of high financial distress.
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Faculteit der Managementwetenschappen