Unconventional Monetary Policy Measures and their Impact on the Markets

The Eurosystem has responded to the current crises with several conventional and unconventional measures. In the past few years, rates have been lowered – even into negative territory – and asset purchase programmes have been implemented. Financial markets have changed significantly and the Eurosystem’s extraordinary measures have had a profound role to play in this.

The first purchase programme for covered bonds was aimed at reviving a temporarily dysfunctional market segment. The programme was successful in restoring market confidence, but even at that early stage the Eurosystem faced a time-inconsistency problem. The announcement effect of the purchase programme marginalised the impact of the subsequent purchases. This effect became even more apparent with the announcement of the current Public Sector Purchase Programme. Additionally, market reaction counteracts monetary policy intention when exaggerated expectations fall short of a programme extension. Decision-makers are faced with the problem that effects of monetary stimuli in the transmission process are no longer awaited if new measures are not announced immediately.