歐盟國家之貨幣與通膨 - 政大學術集成

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(1)國立政治大學經濟學系研究所. 博士學位論文. 歐盟國家之貨幣與通膨 The money and inflation union countries 治政 in European. 大. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 指導教授：吳中書. 博士. 洪福聲. 博士. 中華民國. 研究生：謝衣鳯. 撰. 一 ○ 八. 年. 七. 月. DOI:10.6814/NCCU201900987.

(2) Acknowledgements My deepest gratitude goes first and foremost to Professor Wu, Chung-Shu, my supervisor, for his profound knowledge in economics and being instructive in offering advices for this dissertation. Without him, it would have been impossible for this dissertation to reach its present form.. Also, I would like to express my heartfelt gratitude to all the teachers who guided me into the field of Economics, especially Professor Hung, Fu-. 政治大. Sheng. In addition, I am also deeply indebted to all the oral defense. 立. committee members for their precious suggestions.. ‧ 國. 學. Finally, I am grateful for my beloved family for their love and indefinite. ‧. confidence in me. I also would like to thank my friends and fellow. sit. y. Nat. classmates who offer kind help to help me overcome all the difficulties. n. al. er. io. throughout the years of study.. Ch. engchi. i n U. v. ii. DOI:10.6814/NCCU201900987.

(3) Abstract After the 2008 global financial crisis beginning in the U.S., the major economies have been infected by the global systematic financial turmoil. In that case, major monetary authorities have taken preemptive unconventional monetary policies immediately after the interest rate policy fail to keep financial market functioning. Unconventional monetary policy is usually considered as balance sheet policy in peacetime. Recently, a vast of literatures concerning the effects of balance sheet policy shocks reveal that balance sheet policy shocks affected the output and price level positively. Rather, we find that the monetary base and broad money in European Union countries grew disproportionately after the crisis. In this paper, we apply two panel data models to estimate the inflation effects in European Union countries. We have several findings. First, ECB coordinated central banks to conduct large-scale assets purchase in the euro area, but balance sheet policy has affected these countries differently. Moreover, the Panel VAR results shows that the inflation effect of the mean group is smaller than the results of most empirical literatures. Besides, each individual European Union country responds to balance sheet policy shocks with heterogeneous inflation effects. In addition, some EU countries, such as Belgium, Cyprus, Denmark, Spain, Ireland, Italy, al v deflation replies. i Luxembourg, Poland, Slovenia, and Slovakia, even show n Ch n gindicate c h i Uthat inflation and monetary Lastly, empirical results of paneledata base growth rate reveals a significant negative relation, while inflation and M3 growth rate has a positive relation.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. Keywords: Unconventional monetary policy, balance sheet policy, inflation. 3. DOI:10.6814/NCCU201900987.

(4) Contents Chapter 1. Introduction ............................................................................................... 6 1.1 Monetary policies since global financial crises ............................................. 6 1.2 The empirical facts of monetary policies in major economies during financial crises ................................................................................................ 7 1.3 Some money and inflation outlook of European Union countries after 2008 ............................................................................................................... 15 1.4 Research Motivation and Method ............................................................... 22. 政治大 2.1 The effects of balance sheet policy after the crises: approaches and 立. Chapter 2. Literature Review ................................................................................... 25. empirical evidences ...................................................................................... 26. ‧ 國. 學. 2.2 Literatures related European Union countries .......................................... 31. ‧. Chapter 3. Empirical processes and results ............................................................. 37. y. Nat. 3.1 European Union Ｃross-Ｃountries Evidence: Panel Vector. er. io. sit. Autoregression..............................................................................................37 3.2 European Union Ｃross-Ｃountries Evidence: Panel Data Results ......... 52. al. n. v i n Ch Chapter 4. Conclusion ...............................................................................................59 engchi U APPENDIX A ............................................................................................................. 63 APPENDIX B ............................................................................................................. 73 REFERENCES ……..……………………………………….…………………………………………………82. 4. DOI:10.6814/NCCU201900987.

(5) Figures and Tables Figure 1 The money and inflation of U.S. 2007–2017 ................................................ 10 Figure 2 The money and inflation of Japan 1999–2017 .............................................. 11 Figure 3 The money and inflation of Euro Area 2007–2017 ....................................... 12 Figure 4 The money and inflation of PIIGS 2008 - 2017 ............................................ 18 Figure 5 The money and inflation of CEC 2008 – 2017.............................................. 20 Figure 6 The money and inflation of Finland and Luxembourg 2008 – 2017 ............. 21 Figure 7 The mean group impulse function ................................................................. 44 Figure 8 The central bank asset impulse functions of European Union countries ....... 46 Figure 9 The inflation impulse functions of European Union countries...................... 47 Figure 10 The output growth impulse functions of European Union countries .......... 48 Figure 11 The stock market impulse functions of European Union countries ............. 48. 政治大 Table 1 Main studies about the impacts of large-scale asset purchases in Japan, US 立 and Euro Area .............................................................................................................. 28 ‧. ‧ 國. 學. Table 2 Literatures related European Union countries after 2008 ............................... 33. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 5. DOI:10.6814/NCCU201900987.

(6) Chapter 1. Introduction 1.1 Monetary policies since global financial crises. In 2008, the subprime mortgage crisis started in the United States, and then spread out worldwide, leading to a global financial cataclysm. Major monetary authorities faced a serious situation that easing monetary policy, which set the targets of overnight interest rate in the interbank market to nearly zero, failed to help financial system function due to the credit crunch after the subprime mortgage crisis. Meanwhile, these monetary authorities. 政治大. also adopted unconventional monetary policy, such as lending private. 立. sector and the government directly, and outright purchasing the. ‧ 國. 學. government bonds and corporate debt, in order to sustain economic and financial stability. Recently, considerable attentions have been paid to the. ‧. evidence that these unconventional measures could effectively lower the. sit. y. Nat. yields of the government bonds and driver the investor to riskier assets.. er. io. Meanwhile, central bankers tried to stabilize the financial system by. n. a to the private sector through injecting abundant capitals v large-scale assets purchasing programs.. i l C n hengchi U. The 2008 financial crisis in U.S. originated from the high leverage of housing mortgage in commercial banks and financial institutions in the private sector, which caused to asset price bubble in U.S. Fed used twopillar monetary policy, i.e., unconventional measure of large scale asset purchasing program and conventional measure of forward guidance, to stable the international and domestic financial markets and stimulate economic activities. Although ECB and major central banks of European union countries adopted unconventional measures to prevent the 6. DOI:10.6814/NCCU201900987.

(7) international systematical risks from transmitting through trade and financial channels, the downswing of global economic situation, major investors of commercial banks and financial institutions in the private sector still lacked of confidence in the future prospects of European countries due to the weakening of economic activities after the severe recession since 2008. The sovereign debt piled up after governments adopted countercyclical fiscal policy as sovereign debts continued to increase in advanced and developed countries. Fiscal policies are an important aspect concerning these crises;. 政治大 however, in this dissertation we focus on the relationship between money 立 and inflation engendered from monetary policies.. ‧. ‧ 國. 學. 1.2 The empirical facts of monetary policies in major economies during. sit. y. Nat. financial crises. a. er. io. From the perspective of quantity theory, the change rate of money. n. iv l growth causes proportional change rate of n inflation. However, the. Ch. U i e h n c g empirical studies, such as Lucas (1980), Sargent and Surico (2011), and Grauwe and Polan (2005) indicate that the ratio of. money growth and. inflation is approximately more equivalent in the early 19th century than that at the end of 19th century. Furthermore, Grauwe and Polan (2005) indicates that in the sample period from 1966 to 1999, different proportions between the change of money growth and inflation come from the differences in inflation intensity in their sample countries, which means the relation between money and inflation is more proportional in the group of high-inflation countries than the group of low-inflation (less than 10 7. DOI:10.6814/NCCU201900987.

(8) percent per annum). During this special period of time since 2008, major economies adopted unconventional measure of balance sheet policy, such as large-scale asset purchases, to increase liquidity by injecting money into the real economy. However, it was hard to perceive the "monetary phenomenon" proposed by Friedman (1963) in the real economies. The rest of this section, the implement of unconventional monetary policy of Japan, U.S. and Euro Area will be discussed in order. Quantitative easing (QE) was first introduced in Japan; however, the unconventional monetary policy by Japanese monetary authorities did not. 政治大 bail Japan out of deflation, which lasted for two decades. From the QE 立. experience of Japan after asset bubble crisis during 1990’s, Bank of Japan. ‧ 國. 學. (BOJ) conducted interest rate policy first, and shifted to balance sheet. ‧. policy QE after the zero interest rate policy (ZIRP) failed to stimulate the. y. Nat. weak Japanese economy. The BOJ adopted quantitative easing to relieve. er. io. sit. monetary and financial conditions, but Shizume (2018) illustrates the BOJ data of annual change of balance sheet and 3-year-average GDP deflator. al. n. v i n C hthat the annual change between 1892 to 2017 shows rate of BOJ balance engchi U. sheet seems unrelated to the annual change rate of GDP deflator since 1992. It also reveals that the change of balance sheet, whether increase or decrease, does not affect the inflation. In addition, the GDP deflation curve, compared to the previous periods, became smooth from 1987 to 2017, especially volatile during the wartime. There are controversies as to whether Japanese QE is ineffective in stimulating the weak economy and consequently rise the price level. One stream of literatures, such as Eggertsson and Woodford (2004); Krugman (2000); Svensson (2003), attributes the unavailing of BOJ quantitative 8. DOI:10.6814/NCCU201900987.

(9) easing to liquidity–trap theory, another stream of literatures, such as Cargill (2000), Ito (2006), Okina and Shiratsuka (2003), attributes the deficiency of monetary policy to the independence gap of BOJ, and the other stream of literature, such as Bernanke (2000), Hamada and Okada (2009); McKinnon and Ohno (2001), attributes the Japanese prolonged stagnation to monetary exchange rate policy. The Federal Reserve started large-scale asset purchasing programs by buying mortgage-backed securities and treasury notes from November 2008 since the global financial crisis, which is the beginning of Fed. 政治大 quantitative easing process. In Figure 1, it shows the money and inflation 立. of the United States since 2007. From Jan. 2008 to May 2017, it illustrates. ‧ 國. 學. the US monetary base amount increased 4.45 times; however, the annual. ‧. growth rate of US CPI was 4.28% in Jan. 2008 and dropped to 1.87% in. y. Nat. May 2017. In addition, the indicator of monetary base growth and the. er. io. sit. indicator of M2 (money supply) growth grow asymmetric as Figure 1 illustrated. Obviously, the increase of monetary base growth does not lead. al. n. v i n to proportional increase ofCmoney and the indicator of inflation U h e nsupply, i h gc. maintains flat in the low level. The amount of monetary base increased by 345% in about 10 years, but the amount of M2 was only increased by 80.47% in the same period. In contrast with the large-scale asset purchasing process of Fed, BOJ quantitative easing seems less effective. Japan implemented quantitative easing from Mar. 2001 to Mar. 2006, and Koo (2011) illustrates that the change of monetary base amount was raised to approximately 65%, but the quarterly growth rate of core CPI remained in the range from negative to. 9. DOI:10.6814/NCCU201900987.

(10) 立. 政治大. ‧ 國. 學. ‧. Notes: Monetary Base is adjusted monetary base, M2 is M2 money stock which seasonally adjusted, and CPI is Consumer Price Index: Total all items for U.S., all indicators are presented as growth rate of same period previous year, monthly data. Sources: Federal Reserve Bank of St. Louis, and Datastream.. er. io. sit. y. Nat. n. Figure 1 The money a and inflation of U.S. 2007–2017. iv l C n hengchi U. around zero. It is worth mentioning that the Japan banks’ lending was even decreased by approximately 13% after BOJ implemented quantitative easing, whereupon M2 was increased by merely 9%. As illustrated in Figure 2, it is found that the growth rate of CPI was climbing before the global financial crisis and slump below zero after the crisis erupted. The increase of monetary base does not lead to the increase of money supply M2; besides, the indicator of monetary base was stable before the 2008 crisis, but started to climb after BOJ conducted comprehensive monetary easing policy in Oct. 2010. The indicator of inflation took a leap with a 10. DOI:10.6814/NCCU201900987.

(11) 立. 政治大. ‧. ‧ 國. 學. Notes: Monetary Base is adjusted monetary base, M2 is M2 money stock which seasonally adjusted, and CPI is Consumer Price Index: Total all items for Japan, all indicators are presented as growth rate of same period previous year, monthly data.. io. sit. y. Nat. Sources: Bank of Japan, and Federal Reserve Bank of St. Louis.. n. al. er. Figure 2 The money and inflation of Japan 1999–2017. Ch. i. e. i n U. v. n growth g c h rate after the earthquake took dramatic increase in monetary base place in March 11th 2011; however, the indicator of inflation began to decrease after BOJ conducted a new unconventional measure – quantitative and qualitative easing (QQE) in Apr. 2013. Following the 2008 financial crisis, the European sovereign debt crisis took place in early 2010. The central bankers of European Union adopted intensive unconventional monetary measure to remedy severe economic. 11. DOI:10.6814/NCCU201900987.

(12) 立. 政治大. ‧. ‧ 國. 學. Notes: Base money is seasonally adjusted Base money, M3 is monetary aggregate M3, and CPI is Consumer Price Index: Total all items for Euro Area. all indicators are presented as growth rate of same period previous year, monthly data. Sources: European Central Bank, and Federal Reserve Bank of St. Louis.. sit. y. Nat. io. er. Figure 3 The money and inflation of Euro Area 2007–2017. al. n. v i n C h 3 demonstratesUthat the CPI growth rate in and financial situations . Figure engchi 1. the euro zone stood at around 4% in Jun. 2008, but dropped to -0.7% in Jul. 2009; the CPI growth rate subsequently remained at constantly low level from Jul. 2009 to Nov. 2011. ECB conduct the interest rate policy and balance sheet policy in turns during this period. 2 After Nov. 2011, the inflation indicator of euro area was on the process of gradually decreased until Dec. 2014. ECB started to conduct the negative interest rate policy. 1. See Appendix Table I. It lists the major monetary measures of US., Japan and Euro area after 2008 global financial crisis. 2 See Appendix Table I.. 12. DOI:10.6814/NCCU201900987.

(13) after governing council lowered the interest rate of deposit facility under zero on 11th June 2013, and started the asset purchase program (APP) on 1st September 2014. ECB announce to expand the asset purchase program twice on 22nd Jan. 2015 and 2nd Jun. 2016, which enlarge the amount of asset purchase and broaden the target assets. From the money and inflation data of major economies, it is found that the indicators of broad money growth, M2 or M3, are not in accordance with the rising of monetary base growth. It reveals that major monetary authorities expand the monetary base by conducting unconventional. 政治大 monetary measures to maintain the liquidity of financial system, but did 立. not produce proportional money supply in the real economy. Koo (2015). ‧ 國. 學. also indicates that these unconventional monetary measures implemented. ‧. by major central banks fail to stimulate real economy, owing to the. y. Nat. contraction of real economic activities after the rapid increase of economy. er. io. sit. growth. The balance sheet recession may lead to the investment shrinkage in the private sector and unable to produce the sufficient money supply. al. n. v i n C hof private financial channel sector engchi U. through the lending. into the real. economy. In tradition, monetary authorities increase money supply by money multiplier created when commercial banks lend to households and firms. Once the process of the money creation is obstructed, these unconventional monetary measures may not affect the real economic activities and thereby has less effects on the output and inflation. Thus, those major economies launching unconventional monetary policy after the crises do not induce the pressure of inflation. Recently, a vast of literatures, such as Peersman (2011), Hausken and Ncube (2013), Gambacorta et al. (2014), and MacDonald (2017), discuss 13. DOI:10.6814/NCCU201900987.

(14) the effects of major economies implementing balance sheet policy, which consider euro area a single sample or merely focus on several critical economies, such as U.K, Sweden et al., and overlook countries in euro area have different circumstances of national economic and financial condition, balance of trade, government revenue, and expenditure. Besides, there are some literatures, such as Casiraghi et al. (2013), and Fratzscher et al. (2016) et al., that are concerned on the effects of ECB balance sheet policy, but omit the non-euro countries, especially non-euro European Union (EU) countries. Moreover, some literatures, such as Boeckx et al. (2014),. 政治大 Bluwstein and Canova (2016), Kucharčuková et al. (2016); Moder (2017) 立 et al., that focus the effects of balance sheet policy on few European. ‧ 國. 學. countries but omit the heterogeneities of the other countries.. ‧. Based on the Treaty on Functioning of the European Union and the. y. Nat. Statute of the European System of Central Banks and of the European. er. io. sit. Central Bank, European Central Bank (ECB) cooperate with the national central banks of countries adopting the euro to maintain the euro-area price. al. v i n C halso works withU central ECB engchi. n. stability.. 3. Meanwhile,. banks of all EU. member countries under the European System of Central Banks (ESCB) which is in charge of the intra-ESCB cooperation.4 In the single market framework, each EU country guarantees the free movement of most goods, services, money and people; although every non-euro EU country has its own monetary policies, whether conventional or unconventional, the tight connections through trade link and remittance flows within euro area 3. Based on the Treaty on the Functioning of the European Union and the Statute of the European System of Central Banks and of the European Central Bank, The ECB was funded as the center of the Eurosystem and the ESCB for the single monetary policy of EU. 4 The ESCB comprises the ECB and the national central banks (NCBs) of all EU Member States whether they have adopted the euro or not.. 14. DOI:10.6814/NCCU201900987.

(15) countries make it extraordinary affected by the balance sheet policy from countries which implement unconventional monetary measure. In the next section, we will discuss the money and inflation outlook of European Union countries.. 1.3 Some money and inflation outlook of European Union countries after 2008. This section follows on from the previous section, which outlined the. 政治大. money and inflation facts about European Union countries. Compared to. 立. the euro area money statistics (in Figure 3), we review the statistics of five. ‧ 國. 學. euro-area countries, Portugal, Ireland, Italy, Greece, and Spain, which experience unprecedented pressure of sovereign debts default due to. ‧. weakened economic output after late 2008, budget deficit and high-level. y. Nat. sit. debts. In Figure 4, the indicator M3 of these five countries started to. a. er. io. decrease after subprime mortgage crisis. In May 2017, the total amount of. n. v l lowered as half as the broad money M3 of Greece n i amount in Jan. 2008, Ch. U i e h n c g and this result was owning to different monetary policies.. In general, the broad money is decreasing gradually in comparison with the conditions before the crises, even though the national central banks indeed expanded the monetary base by balance sheet policy. This implies the fact that the effects of unconventional monetary policy were neutralized in countries suffered from or were under the threats of sovereign debt defaults. Clearly, the different economic and fiscal conditions make the heterogeneities of the money statistics within euroarea countries, even under single monetary authority. On the other hand, 15. DOI:10.6814/NCCU201900987.

(16) those non-euro countries but later joined European Union – the single market framework reveal the different money statistics.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 16. DOI:10.6814/NCCU201900987.

(17) 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 17. DOI:10.6814/NCCU201900987.

(18) 立. 政治大. ‧ 國. 學. ‧. Notes: CPI is All-items HICP, all indicators are presented as growth rate of same period previous year, monthly data. Source: Datastream, and Eurostat.. y. Nat. er. io. sit. Figure 4 The money and inflation of PIIGS 2008 - 20175. n. a the money and inflation Figure 5 shows that v statistic of central. i l C n h eCzech European countries (CEC), the h i U Hungary, and Poland. It n g cRepublic,. illustrates that monetary base of Czech and Poland increased rapidly after ECB conducted zero interest rate policy while the indicator of Hungary increase after ECB proceeding securities market program. The indicator of M3 was in a higher level than monetary base before the rapidly rise of monetary base. 6 Corresponding to other major economies, the rapid increase of monetary base; however, does not cause the proportional. 5. PIIGS is an acronym for five euro-area countries, i.e. Portugal, Ireland, Italy, Greece, and Spain. See Appendix Table I. It lists the major monetary measures of US., Japan and Euro area after 2008 global financial crisis. 6. 18. DOI:10.6814/NCCU201900987.

(19) 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 19. DOI:10.6814/NCCU201900987.

(20) 政治大. 立. ‧ 國. 學. Notes: CPI is All-items HICP, all indicators are presented as growth rate of same period previous year, monthly data. Source: Datastream, and Eurostat.. ‧. Figure 5 The money and inflation of CEC 2008 – 2017. sit. y. Nat. a. er. io. increase of money supply. Another group of money statistics, Finland and. n. v l in Figure 6.7 Compared Luxembourg, is illustrated n i to euro-area indicator Ch. U i e h n c g of monetary base in Figure 3, the expansion of monetary base on this group. are extremely large than other euro-area countries. The growth rate of Finland's monetary base reached its all-time peak of 300% after sovereign debts crisis; its overall scale of monetary base increased by 9.32 times after the ECB began its zero-interest rate policy. Similarly, growth rate of Luxembourg's monetary base reached its peak of 500%, while the overall scale of its monetary base grew by 12.13 times before the crises.. 7. The rest of money and inflation figures of individual European Union countries are collected in the appendices.. 20. DOI:10.6814/NCCU201900987.

(21) 政治大. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Notes: CPI is All-items HICP, all indicators are presented as growth rate of same period previous year, monthly data. Source: Datastream, and Eurostat.. Figure 6 The money and inflation of Finland and Luxembourg 2008 – 2017 These empirical facts of money are obviously counterintuitive, but 21. DOI:10.6814/NCCU201900987.

(22) take whole euro area as single sample would overlook the heterogeneities between individual European Union countries. Rather, there are less literatures investigating the reasons why euro area countries, which adopting unconventional monetary policy, but encounter heterogeneities of inflation. In this study, we propose an alternative way to assess the more information of the effects of central bank balance sheet policy from these heterogeneities of European Union countries.. 政治大. 1.4 Research Motivation and Method. 立. As discussed above, the U.S. model of implementing unconventional. ‧ 國. 學. monetary policy seems effective in stimulating economic activities from the great recession after the subprime mortgage crisis. In 29th October 2014,. ‧. the FOMC announced the end of large-scale asset purchasing program and. Nat. sit. y. prepared for the normalized stance of monetary policy. In 16 th December. a. er. io. 2015, it was the first time that FOMC increased the target range of federate. n. i v went through two l On the contrary, thenBOJ fund rate since the crisis.. Ch. process of unconventional. U i e h n c g monetary policy in. two decades, which. conducted quantitative easing from 2001 to 2006, and conducted the quantitative and qualitative monetary easing (QQE) from 2013 until now. As a result, Japanese still struggle to dispose of the “era of deflation.” In preceding two sections, we discuss the money and inflation statistics of euro area and individual European Union countries. When we take individual country out of the whole euro area, the money and inflation statistics reveals the dissimilarities from the overall statistics.. These. dissimilarities also exist in the comparison of preceding section (as shown 22. DOI:10.6814/NCCU201900987.

(23) in the Figures). Obviously, the global financial crisis was transmitted through trade links, capital flows, and commodity prices, and consequently, each individual European Union country was influenced differently due to its circumstance, fiscal policy and some countries conducting its own monetary policy. However, the balance sheet policies conducted by ECB may affected these European Union countries in different degrees. The ECB is the core of all the national central banks that coordinates and conduct the “single” monetary policy, whether conventional or unconventional.. However,. individual countries have different 政治大 circumstances of government revenue and expenditure, balance of trade, 立. and economic conditions. The effects of balance sheet policies differ in the. ‧ 國. 學. heterogeneous European economies. Because of this, we use a panel vector. ‧. autoregression (PVAR) model to highlight the cross-country dimensions of. y. Nat. individual European Union countries, and hope to shed some light on the. er. io. sit. relationship between money and inflation during economic downturns. In the first part of estimation, we expand the application of panel. al. n. v i n C model vector autoregression (VAR) Gambacorta et al. (2014) from the U h e n of i h gc. original eight economies to include twenty-eight EU countries. The model designed is beneficial to use less macroeconomic variables by panel technique for exploiting the cross-country feature to acquire more empirical analysis. In particular, Gambacorta et al. (2014) emphasizes on the high degree of commonality existing in monetary policies implemented, financial market dynamics, and business cycles of the eight major economies in their studies. However, the dissimilarities existing in all aspects as mentioned above, especially dealing with 28 sample countries of European Union. 23. DOI:10.6814/NCCU201900987.

(24) As the result, we find that the commonality is not the requirement for this model set and heterogeneities existing in each individual country on the way of recovery from these financial crises, beyond the regional statistics. On the whole, macro variables setup of this model depicts critical collective factors of these finance crises and make the analysis tractable. It is found that balance sheet policy shock leads to significant but very small rise in output growth and inflation, the peak value in the mean group estimation is 0.007% and 0.0016%, respectively. These results are smaller than Euro Area results of Gambacorta et al. (2014), and we find individual. 政治大 country impulse function of inflation fluctuating divergently to reply 立 balance sheet policy shocks.. ‧ 國. 學. Secondly, we use the panel data models additionally to examine the. ‧. correlated variables with inflation in literatures in order to discover the. y. Nat. crucial factors inducing the heterogeneity of inflation. In panel data model,. er. io. sit. we find that monetary base has counterintuitive relation with the inflation of each country. In some EU countries, the monetary base even has. al. n. v i n C h The remainderUof paper inflation. engchi. negative relation to. is organized as. follows. The following section presents the related literatures. The succeeding sections discuss the econometric model and the results. The final section concludes and discusses implications of the results for theoretical modelling and policy.. 24. DOI:10.6814/NCCU201900987.

(25) Chapter 2. Literature Review Since the 2008 global financial crisis, the policy rates have reached the effective lower bounds, and central balance sheets have replaced the interest rates as the main policy instrument. It is also called the unconventional monetary policy, distinguished from the conventional interest rate policy; moreover, using central banker balance sheets to influence monetary and financial condition usually involves large-scale asset purchases, thus entitled quantitative easing as well. BOJ was the first. 政治大. fulfillment of quantitative easing while interest rate policy is invalid to. 立. stimulate the economy and stop the deflation after Japanese asset price. ‧ 國. 學. bubble. From the empirical experience, balance sheet policy does not necessarily decouple with interest rate policy. Federal Reserve, Bank of. ‧. England and ECB are the examples. During central bankers fulfilled. y. Nat. a. er. io. still positive.8. sit. balance sheet policy after the crisis, the policy rates of these countries were. n. v In European Unionl member countries, most n i monetary authorities, Ch. U i e h n c g such as ECB, BOE, and Riksbank, expand the size of monetary base by. large scale assets purchase, and consequently increase the currency, central bank liabilities and deposits, the liquidity in the financial system, but does not increase the lending and money supply in the private sector. This process, as quantitative theory suggested, might result in the phenomenon that too much money chasing too few goods; yet, the inflation does not. 8. Borio and Disyatat (2010) indicates that unconventional monetary policy is “not really unconventional” essentially. There are some reasons. First, the key feature of balance sheet policies is that they can be entirely decoupled from the adjustment of target interest rates. Second, unconventional monetary policy is just central bank operation targeted a specific market segment chosen.. 25. DOI:10.6814/NCCU201900987.

(26) come up with expansionary of monetary base. Literatures indicate that central banks act as the purchaser-of-the-last-resort to acquire the unreceptive government debt by private capital market lead to hyperinflation (Fischer et al., 2002). However, the European Union countries after the global financial crisis are not the case. The Effects of balance sheet policy implemented in European Union countries are divergent, which not endangered by the high inflation. As we discussed in the preceding chapter, the imbalance between monetary base. 政治大 major monetary authorities expanded their balance sheet by acquiring 立 and money supply may result in that soaring inflation disappeared while. extremely large-scale assets in both public and private sectors. In the. ‧ 國. 學. following chapter, we firstly review literatures about the effects of Japan,. ‧. and U.S. balance sheet policies conducting, and then scrutinize those. io. a. y er. implemented after the financial crises erupted.. sit. Nat. literatures concerning the European countries balance sheet policy. n. v 2.1 The effects of balancelsheet policy after the crises: n i approaches and empirical evidences. Ch. engchi U. There are several approaches in studying the effects of balance sheet policy on macroeconomic variables. Among them is the dynamic stochastic general equilibrium based (DSGE-based ) model, the examples of this stream are Gertler and Karadi (2013), Chen et al. (2012), and Cova et al. (2015). Others, such as DSGE-based models with counterfactual analysis, adopted an estimated shadow rate describing the relations between different yields and policy rates. The example are, Cova et al. (2015) and Wu and Xia (2016). Second approach is vector autoregression 26. DOI:10.6814/NCCU201900987.

(27) (VAR) model with varieties of specification. Our estimation belongs to this classification. The examples are, Gambacorta et al. (2014), Weale and Wieladek (2016), and Michaelis and Watzka (2017). As well, a branch of VAR literatures are adopted shadow rate to describe different macroeconomic circumstances, such as Hausman and Wieland (2014), Wu and Xia (2016), and Kucharčuková et al. (2016). The other approaches are based on the large-scale macroeconomic model consisting of estimated equations for specific economy and supported by national central bank, such as Q-JEM. (Kan et al.,2016). 政治大 We find that literatures concerning the relationship between money 立. and inflation after 2008 normally discuss the impact of balance sheet policy. ‧ 國. 學. conducting on inflation. Therefore, we draw some attentions on this strand. ‧. of literatures. In Table 1, we list most literatures concerning the balance. y. Nat. sheet policy conducting, and results of the macroeconomic effects.. er. io. sit. Literatures reveal a general agreement with that the balance sheet policy is effective on the recovery of economic activities. From the money and. n. al. inflation outlook of majorCeconomies and h. engchi. iv n European U. union countries,. monetary authorities deploy the tools unprecedentedly, however the growth of output and inflation are stubbornly low. In particular, Haldane et al. (2016) conduct a SVAR estimation from 2008 to 2015, which consisted of UK, US, Japan, Euro Area, Sweden, and Canada, and the output as well as inflation effects after imposing balance sheet policy reveal negative in some economies, such as Euro Area, Japan, Sweden, and Canada. Haldane et al. (2016) indicate that the effects of central bank balance sheet expansion vary over time, and the spillovers effects are stronger in the advanced economies through the financial market channels. 27. DOI:10.6814/NCCU201900987.

(28) Table 1 Main studies about the impacts of large-scale asset purchases in Japan, US and Euro Area Study. Countries/. Time span. Methods. 1996:Q1 to 2012:Q4. VAR and. Results description (Peak impact of GDP and CPI). Data set Japan Japan. Wieland (2014). 立 counterfactuals 2012:Q4 to 2013:Q1; Q-JEM. CPI is increased by 0.3 to 1.5%. predicting 2014 to. GDP is increased by 0.6 to 4.2%. 2015. Japan. 1994:Q1 to 2015:Q2. announcement).. y. 1996:Q1 to 2015:Q3. io. Michaelis and. Inflation is increased by 0.8% (analysis of 2% inflation target of BOJ. Nat. Iacoviello (2016). 1974:Q1 to 1993:Q4; VAR. al. US Baumeistera and. US and UK. Benati (2012) Gertler and Karadi. 1965 to 2011. Ch. i n U. QE1 and QE2. v. After 1% QE shock, GDP increased by 0.58% (ZIRP), 0.45%(QE1),. e n g c handi 0.34%(Abe), respectively.. TVP-SVAR. (simulation for 2009) US. After 1% QE shock, Core CPI is increased by 0.21% (ZIRP), 0.17%(QE1), and 0.23%(Abe), respectively.. n. Watzka (2017). TVP-VAR. sit. Japan. ‧. De Michelis and. ‧ 國. Japan. 學. Kan et al. (2016). has an effect of 1.1 to 1.8% on 2013 GDP growth. 政治Abenomics 大 forecast-based. er. Hausman and. GDP growth is increased by 0.9 % Inflation is increases by 0.5 %. DSGE-based. For QE1: GDP is increased by 3.5%. 28. DOI:10.6814/NCCU201900987.

(29) (2013). counterfactual. Inflation is increased by 4 % For QE2: GDP is increased by about 1% Inflation is increased by 1.5 %. 2014 US. Tillmann (2016). 立. August 2007 to. Euro Area. China, Japan,. (2015). US, and rest of the world. al. Multiple countries analysis Haldane et al. (2016). model with a set. Inflation(year-on-year) is increased by 0.61%. DSGE-based. For euro area,. model. GDP is increased by 1.4% Inflation is increased by 0.8%. n. and Pisani. GDP is increased by 1.09%. interest rates. 2015:Q1 to 2016:Q3. io. Euro Area,. DSGE-based of shadow. Nat. Cova, Pagano,. Inflation is increased by 0.1-0.2%. ‧. (2019). 2014:Q1 to 2017:Q2. increased by 0.62% 政治CPI is大 Qual-VAR GDP is increased by 0.1%. 學. Mouabbi and Sahuc. GDP is increased by 0.58%. March 2013.. Euro Area. (US)Asset purchase shocks:. y. Meinusch and. Bayesian VAR. sit. (2016). Mar 2009 to May. er. US and UK. ‧ 國. Weale and Wieladek. Ch. engchi. Structural VAR. i n U. v. UK, US,. For Japan: (QE1). After 1% QE shock, CPI is increased by -0.1% (CA), 0.1%(EA), 0.45%. Japan(J), and. April 2001 to July. (to -0.1) % (JQE1), 0.85%(JQE2), -0.18% (SW), 0.025%(UK), and. Euro. 2008; (QE2) August. 0.32%(US), respectively.. Area(EA),. 2008 to February. After 1% QE shock, real GDP is increased by -0.8% (CA),. 29. DOI:10.6814/NCCU201900987.

(30) Sweden(SW),. 2015. -0.04 %(EA), 0.38% (J-QE1), -0.1%( to 0.1) %(J-QE2),. Canada(CA). For others: March. 0.04 (to -0.25) % (SW), 0.1%(UK), and 0.35%(US), respectively.. 2009 to February 2015. Note: Q-JEM was large-scale macroeconomic model of Japan's economy consisting of more than two hundred equations, which is estimated to. 政治大. fit historical data to capture key characteristics of the Japanese economy. For Michaelis and Watzka (2017), the results are estimated under three scenarios, which are in zero interest rate policy, quantitative easing, and Abenomics since late 2012. Source: Borio and Zabai (2018), and Dell'Ariccia et al. (2018).. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 30. DOI:10.6814/NCCU201900987.

(31) They also illustrated that the overall scale of BOJ’s balance sheet assets reached 80% of Japan’s nominal GDP and 32% of Japanese government’s outstanding debt in 2016 due to Japan’s quantitative easing. On the other hand, US Fed’s large-scale asset purchases made its balance sheet assets reach 30% of the US nominal GDP and 25% of the US government debt. As a result, Fed has ceased the large-scale asset purchase program, and Quantitative and Qualitative Easing of BOJ is still on-going.. 政治大. 2.2 Literatures related European Union countries. 立. Literatures are limited concerning the relation of money and inflation. ‧ 國. 學. after the 2008 financial crises. Only four papers discuss the output and inflation effects of the periphery European Union countries from the. ‧. spillovers of ECB balance sheet policy. This stream of literatures is listed. y. Nat. sit. in Table 2. Before scrutinizing each of these papers, we found that the. a. er. io. commonality of these papers is the existence of economic interdependence. n. v l evidences. Maćkowiak which proved by empirical n i (2006) indicates the Ch. U i e h n c g economic interdependence exists between euro and non-euro countries in European Union, by demonstrating that ECB interest rate policy (in Germany) has notable spillovers into Czech, Hungary and Poland (CHP).. The interest policy of Germany comprises one-third of external effect of CHP real output, nearly half external effect on the price level in Czech and for more than two-thirds in Hungary and Poland. In addition, Hájek and Horváth (2016) indicate that monetary contraction in euro countries drags down the economic growth in all European Union countries, and lead to price levels decreasing gradually in these countries. Besides, industrial 31. DOI:10.6814/NCCU201900987.

(32) production, CPI and oil price shocks in the euro countries also results in real economic responses in the all EU countries. Returning to related literatures about the money and inflation in the European Union countries, Bluwstein and Canova (2016) examine both financial and macroeconomic variables with a combination of ECB conventional and unconventional monetary policy shock. In particular, international spillovers of ECB monetary policy occur in the non-euro countries among European Union, and there exist cross-country heterogeneities. They indicate that the macroeconomic effects of balance. 政治大 sheet policy are not identical to euro and non-euro countries. In euro 立 countries, balance sheet measures have ambiguous effects on inflation, but. ‧ 國. 學. these measures have greater effects on inflation of those non-euro countries.. ‧. In particular, the output responses are more obvious in advanced non-euro. y. Nat. countries – Sweden, Norway, Denmark and Switzerland. On the contrary,. er. io. sit. the inflation responses of these four countries to balance sheet policy shocks are negative while the inflation responses of rest non-euro countries,. al. n. v i n CEE and SEE, are positive.CBesides, argue that real exchange regime U h e n gthey i h c. responses of nine non-euro EU countries are negative appreciation.9 That says, the exchange rate transmission channel is activated.. 9. CEE is abbreviation of Central Eastern European countries. In Bluwstein and Canova (2016), Poland and the Czech Republic are grouped in CEE. SEE abbreviation of Southeastern European countries. In Bluwstein and Canova (2016), Hungary, Romania, and Bulgaria are grouped in SEE.. 32. DOI:10.6814/NCCU201900987.

(33) Table 2 Literatures related European Union countries after 2008 Study. Countries/ Data set. Time span. Methods. Results description (Peak impact of GDP and CPI, and others.). Bluwstein and Canova. Advanced countries. Dec. 2008 to May. Bayesian mixed- Output effects: Advanced countries is large than euro area;. (2016). include Sweden,. 2014, mixed monthly. frequency. Norway, Denmark,. and weekly data. Switzerland, CEE. 立. include Poland,. Denmark, Sweden,. io. UK. 2015. Inflation effects: Inflation responses are mainly unaffected.. al. iv. n. Moder (2017). Output effects: Output responses are slow and limited.. y. Hungary, Poland,. VAR. sit. (2016). Jan. 2000 to Jul.. er. Euro Area, Czech,. Nat. Kucharčuková et al.. ‧. Romania, Bulgaria. countries are negative.. ‧ 國. include Hungary,. negative. 政SVAR治大 Inflation effects: CEE and SEE are positive and advance. 學. Czech, and SEE. besides, CEE is insignificant, and SEE is. Ch. SEE countries. Jan. 2008 to Dec.. include Albania,. 2015, Monthly data. Exchange rate effects: Exchange rates respond more quickly, and there is a significant depreciation of non-euro. n U i eBVAR Euro area UMP spilloverngch. countries which boosts the export.. Output effects: Albania, insignificant; BIH -0.01%; Bulgaria,. Bosnia and. positive; Croatia 0.05%; Macedonia,. Herzegovina (BIH),. negligible; Montenegro 0.05%; Romania,. Bulgaria, Croatia,. insignificant; and Serbia 0.05%.. 33. DOI:10.6814/NCCU201900987.

(34) the Republic of. Inflation effects: Albania 0.02%; BIH 0.02%, Bulgaria 0.3%;. Macedonia,. Croatia 0.03%; Macedonia 0.05%;. Montenegro,. Montenegro, positive; Romania 0.04%;. Romania and Serbia. Serbia 0.07%.. Horvath and Voslarova. CECs include the. Jan. 2008 to 2014,. (2017). Czech Republic,. Monthly data. 立. Hungary and Poland. 政PVAR治大Output effects: approximately increase by 11–14% Inflation effects: approximately increase by 2%. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 34. DOI:10.6814/NCCU201900987.

(35) Kucharčuková et al. (2016) indicates that six non-euro countries, including the Czech Republic, Hungary, and Poland (three Central European countries), Sweden and UK (two euro opt-out countries) and Demark (participating in ERM II), respond to ECB balance policy shock divergently, and smaller in comparison with the response to the conventional interest rate policy. More precisely, they indicate that balance sheet policy of ECB does not affect inflation and output significantly; however, it indeed affects the exchange regime quickly. Their conclusion of insignificant inflation and output effects is opposite to the finding of. 政治大 Bluwstein and Canova (2016). 立. Moder (2017) has a dissimilar results concerning the exchange rate. ‧ 國. 學. effect of ECB balance sheet policy spillover, and indicates that the. ‧. exchange regime did not shield from spillovers of ECB unconventional. y. Nat. monetary policy. In particular, ECB balance sheet policy affect output and. er. io. sit. price of South-eastern European countries, especially in prices. Likewise, Horvath and Voslarova (2017) concur with Moder’s finding. They find that. al. n. v i n C h policy had affected ECB unconventional monetary economies of CECs engchi U greatly. The peak output responses of CECs to ECB balance sheet policy shocks are around 11 – 14%, while the price responses are around 2%.. As listed in Table 1, existing literatures usually regard euro area as single economy in the discussions of the inflation and output effects of balance sheet policy shocks. It is difficult to discuss these effects by each individual country. As to European Union countries, existing literatures, Gambacorta et al. (2014), Weale and Wieladek (2016), and Haldane et al. (2016), only adopted countries, like UK, Sweden, for individual analyses. This may overlook the dissimilarities of the inflation responses of 35. DOI:10.6814/NCCU201900987.

(36) individual countries to the expansion of central bank asset which is linked with the expansion of monetary base. As we mentioned in Chapter 1, the money and inflation indicators reveal disproportionate in not only major economies but also the small economies of European Union countries since late 2008, and the heterogeneities of the inflation responses may provide us more information about the imbalance between the money and inflation.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 36. DOI:10.6814/NCCU201900987.

(37) Chapter 3. Empirical processes and results 3.1 European Union Cross-Countries Evidence: Panel Vector Autoregression. In this estimation, we aim to clarify the relations between heterogeneities of individual country inflation response to the balance sheet policy since late 2008. We use the panel VAR model with stochastic volatility to outline macroeconomic variables to balance sheet policy shock over time. 10 Our empirical approach follows Gambacorta et al. (2014).. 政治大. The advantages of this model are, firstly to identify common economic. 立. factors to all economies in the economic depression after financial crises,. ‧ 國. 學. and secondly to use mean group estimator that allows cross-country heterogeneity and does not require the identical structures and dynamics of. ‧. the economies in the VAR model.11 This is particularly important because. sit. y. Nat. it allows us to consider different responses across countries to the shock of. n. al. er. io. balance sheet policy measures.. i n U. C. v. h e n g c h(VAR) The Panel vector autoregression model is estimated as i following equation: 𝑌𝑖,𝑡 = 𝛼𝑖 + 𝐴(𝐿)𝑖 𝑌𝑖,𝑡−1 + 𝐵𝑖 𝜀𝑖,𝑡. (1). where 𝑌𝑖,𝑡 is a vector of the following endogenous variables for each European Union country 𝑖 in time 𝑡 :. 10. As Gambacorta et al. (2014) indicated, structural VAR have been extensively used to analyze the macroeconomic effects of monetary policy. For instance, structural VAR are applied in Bernanke and Blinder (1992), Strongin (1995), Bernanke and Mihov (1998), and Christiano et al. (1999) to study the United States; Peersman and Smets (2003), the euro area. 11 However, this model does not capture the cross-country spillover effects of balance sheet policy measure. In that case, the balance sheet policy shocks for those countries, which not adopting unconventional monetary policy, originate from the open operations of national central banks.. 37. DOI:10.6814/NCCU201900987.

(38) 1. RGDP𝑖,𝑡 ：the nature log of seasonally adjusted real GDP, 2. CPI𝑖,𝑡 ：the nature log of seasonally adjusted consumer price index; 3. TA𝑖,𝑡 ：the nature log of seasonally adjusted central bank total assets; 4. SI𝑖,𝑡：the nature log of seasonally adjusted stock market price index.12 𝛼𝑖 is a vector of constants for each European Union country 𝑖, 𝐴(𝐿)𝑖 is a. matrix polynomial of the lag operator L, and 𝐵𝑖 is the contemporaneous impact matrix of mutually uncorrelated disturbances 𝜀𝑖 for countries 𝑖 = 1, … , N.. The specification of this model simplifies and explains the features in the period. 政治大 conducting balance sheet policy, which 立. includes: (i) the. aggregate output and prices to capture the macroeconomic dynamics, (ii). ‧ 國. 學. the assets holdings by the central banks at the zero lower bound, and (iii). ‧. the major stock market index of each country to capture the financial. y. Nat. market turmoil.13 In addition, we expand the analysis of Gambacorta et al.. er. io. sit. (2014) by examining balance sheet expansions of central bank in a broader set of sample countries and across a broader span of sample period from. al. n. v i n January 2008 to May 2017,Cand European Union countries, h etwenty-eight ngchi U i.e., namely Germany (BD), Belgium (BG), Bulgaria (BL), Croatia (CT),. Cyprus (CP), Czech (CZ), Denmark (DK), Estonia (EO), Spain (ES), Finland (FN), France (FR), Greece (GR), Hungary (HN), Ireland (IR), Italy (IT), Latvia (LV), Lithuania (LN), Luxembourg (LX), Melta (MT),. 12. All the data in this paper is gathered from the Data Stream. About decomposing quarterly real GDP data in order to parallel available monthly monetary data, we use Eviews software (time-series frequency conversion function) to convert quarterly data to monthly data, and choose cubic type of low to high frequency method. 13 Haldane et al. (2016) demonstrated that QE has an upward pressure on the price of corporate bonds and equities, while put a downward pressure on the exchange rate. Furthermore, there is one stream of literature after the crisis proves that unconventional monetary policy surprise affected the stock returns. (Glick and Leduc 2012, Wright 2012, Rogers et al. 2014). 38. DOI:10.6814/NCCU201900987.

(39) Netherlands (NL), Austria (OE), Poland (PO), Portugal (PT), Romania (RM), Sweden (SD), Slovak Republic (SX), Slovenia (SJ), and United Kingdom (UK).14 Data were taken from national central banks as well as Datastream. We use data of European union countries which consist of 19 Euro countries and 9 non-euro countries in this dissertation. 15 The domestic economies of non-euro countries have high degree of economic interdependence with the ECB monetary policy.16 As Gambacorta et al. (2014) suggested, a balance sheet policy shock is identified as an exogenous alteration to central bank balance sheet. The. 政治大 variables are set as policy-makers conduct the monetary measures. In order 立 to accomplish this, we use a mixture of zero and sign restriction on the. ‧ 國. 學. impact matrix B of equation (1). We adopted the sign identification. ‧. restrictions which has been proposed to produce the impulse responses by. y. Nat. means of implied signs.17 In our model, we disentangle real economy from. er. io. sit. balance sheet policy and other financial shocks without imposing a notable impact from the responses of macro-variables by using the mixture. al. n. v i n C hthe output and U restrictions, in order to leave inflation responses open as engchi they are the research inquiries in this estimation. The sign identification assumptions are outlined in Table 3. Conformed to the reference model, we. 14. Bluwstein and Canova (2016) state the onset of ECB unconventional monetary in Dec. 2007 when ECB proceeding €271.6 billion reciprocal currency agreement, whereas our sample period starts from Jan. 2008 to Jun. 2017. We find that most of UMP literatures use early 2008 as the beginning of the sample date period. 15 From official website of EU, the non-euro area member countries are Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Sweden. Member countries negotiate an opt-out from the EU legislation are UK and Denmark. 16 See literatures, such as Dibooglu and Kutan (2001), Fidrmuc and Korhonen (2003), Laxton and Pesenti (2003), Fidrmuc (2004), and Golinelli and Rovelli (2005). 17 The mixture of zero and sign restrictions have been conducted by Canova and De Nicolo (2002) and Uhlig (2005) before. By using mixture restrictions, the permissible impulse function is decreased; consequently, it enhances the identification of balance sheet policy shock.. 39. DOI:10.6814/NCCU201900987.

(40) assume the identifying sign restrictions as following. First, it is assumed that impact of shocks to the central bank balance sheet on output and consumer prices is only one lagged. While the same period impact on output and consumer prices is restricted to be zero, the alteration to both variables are allowed to have an instantaneous impact on the balance sheet and stock market volatility.18 Secondly, recent literatures suggested that open market operation of securities purchase, such as conducting balance sheet policy, would increase the price of equities, thereby we assume that the balance sheet. 政治大 policy shock would lift the stock market index. 立. 19. These restrictions are. bound for only one month after the balance sheet policy shock. Based on. ‧ 國. 學. the usual lag-length selection criteria, one lags of the endogenous variables. ‧. are used in the estimations.20. er. io. sit. y. Nat. Table 3. Zero and sign restrictions of a balance sheet policy shock. n. al. Ch. Output. Prices. log real gdp. log CPI. 0. i n U. v. i Index e n Stock g c hmarket. 0. Central bank assets. log SI. log TA. ≥0. >0. Our model is estimation in following steps. First, each equation of 18. This assumption, as Gambacorta et al. (2014) indicated, is common in monetary transmission studies. It resolves monetary policy shocks from real economy disturbances, such as aggregate supply and demand shocks, and does not push macro-variables to respond in certain directions. 19 Meltzer (1995) suggested the open market buying of securities would make more base money to be held, thereby wealth owners buy the existing bonds and real capital for additional money. 20 As Abrigo and Love (2016) suggest, we first run panel VAR lag order selection on estimated sample, the selection standard is based on the model Bayesian information criteria (BIC), Akaike information criteria (AIC) and Hannan-Quinn information criteria(HQIC).. 40. DOI:10.6814/NCCU201900987.

(41) reduced-form in the VAR model is estimated at each single country level taking into consideration the correlation among the residuals of the same endogenous variable across 28 countries, i.e. the correlation between all countries output residuals, between all price residuals, between all stock market index residuals, and between central bank balance sheet residuals. Second, we identify the balance sheet policy shocks of each individual economy by using the identification of restrictions in Table 3. Followed by the model designed of Gambacorta et al. (2014), since the shocks in equation (1) are mutually orthogonal, 𝐸(𝜀𝑡 𝜀′𝑡 ) = 𝐼 , the variance-. 政治大 covariance matrix Ω of an individual country VAR system is equal to 立. 學. 0 0 −𝑆𝑖𝑛(𝜃)] 𝐶𝑜𝑠(𝜃). (2). y. 0 0 1 0 0 𝐶𝑜𝑠(𝜃) 0 𝑆𝑖𝑛(𝜃). Nat. 1 0 Q = [0 0. sit. orthonormal matrix of the form:. ‧. ‧ 國. 𝐵𝑄𝑄′𝐵′ , where B is the Choleski decomposition of Ω, and Q an. a. er. io. with QQ’=I. Due to B is the Choleski factor of Ω, variations to output and. n. v prices will affect balancel sheet and stock marketn iimmediately, while the Ch. U i e h n c g contemporaneous impact of the third and fourth shocks in the system on. output and prices is restricted to be zero. As the result, one of them is a variation to the stock market index and the other an exogenous shift to the central bank balance sheet, which disentangled by the sign restrictions. Then, we draw a random 𝜃 in the range [0, 𝜋], where the 𝜃 is the same for all countries, and generate the corresponding impulse function for each individual economy: 𝑅𝑡+𝑘 = 𝐴(𝐿)−1 𝐵𝑄(𝜃)𝜀𝑡. (3). The requirement of Gambacorta et al. (2014) is that the two remaining 41. DOI:10.6814/NCCU201900987.

(42) shocks satisfy the sign restrictions for all countries simultaneously with the 𝑆𝐼 𝑇𝐴 condition 𝑅𝑡+𝑘 ≥ 0 and 𝑅𝑡+𝑘 > 0, and then keep the draw. Otherwise,. the draw is rejected. However, we relax the condition of satisfying the sign restriction for all countries to for mean group in order to have enough impulse functions. In accordance with the setting of Gambacorta et al. (2014), we have to repeat the draw by the bootstrapping until having 5000 mean group impulse response functions, and average the impulse response function from the individual economies to get a mean group impulse response function of European Union countries. Even though we relax the. 政治大 requirement, our sample countries are too many to completing the draw. 立. 21. Consequently, we record the 16thand 84th percentiles of this practice in the. ‧ 國. 學. figures. 22 The mean group PVAR impulse function was shown in the. ‧. Figure 7. The impulse function indicates that the overall European Union. y. Nat. balance sheet policy shocks enlarges the central bank balance sheet about. er. io. months in our model.23. sit. 0.06% which in line with reference model, and diminish to 0.01% about 35. al. n. v i n C h and inflationUreply to the shocks with a In addition, output growth engchi. slight upsurge, and the summits are 0.008% and 0.006% respectively. On. the other hand, stock market index growth, denoted the financial system, is more sensitive to the balance sheet policy shocks with an instantaneous. 21. As a result, we take off the data group of Czech and Estonia for completing 5,000 impulse response functions for the rest of countries. 22 As Gambacorta et al. (2014) suggested, the impulse response bands should not be understood as conventional confidence bands since equation (3) reflects model uncertainty by the draw of θ; as well as the sampling uncertainty by the bootstrapping draw. However, the sign restrictions literatures, such as Giordano et al. (2007) and Bénétrix and Lane (2009), usually consider the 16th and 84th percentiles of the impulse respond distribution as the confidence interval. 23 Gambacorta et al. (2014) indicate that the ECB unconventional monetary policy shock is characterized by an increase in the euro area central bank balance sheet of about 2.5% that diminish to 0.4% after about 4 months from their impulse function.. 42. DOI:10.6814/NCCU201900987.

(43) upright response, and its summit is about 0.3%. Our mean group PVAR results are in line with literatures, which revealing both output growth and inflation are affected by the shocks, but extremely small.24. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 24. See literatures, such as Baumeister and Benati (2010), Gertler and Karadi (2011), Kapetanios, Mumtaz et al. (2012), Gambacorta et al. (2014), Pesaran and Smith (2016), and Weale and Wieladek (2016).. 43. DOI:10.6814/NCCU201900987.

(44) 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Note: Horizon is monthly, and the shadow area is the 16th and 84th bootstrap percentiles.. Figure 7 The mean group impulse function To inspect the individual country impulse responses, each country has balance sheet increase for answering the shocks, however with divergent degree. The advance economies of euro area, i.e., Germany, France, and Netherlands, response to the balance sheet policy measures with higher 44. DOI:10.6814/NCCU201900987.

(45) increase than the mean group Panel VAR impulse response and also fade out faster (about 2 to 20 months) than the mean group impulse function. Those euro countries which suffer sovereign debt crises, i.e. Cyprus, Spain, Greece, Ireland, Italy and Portugal, have dissimilar increase of central bank balance sheet assets responding to shocks, some are higher while some are lower, but their impulse responses do not fade out, yet maintaining higher than the benchmark impulse response. The opt-out countries of European Union, UK and Denmark, UK has 8% increase while Denmark with 7% increase responding to the shock, and their impulse responses disappear. 政治大 with faster speed, about 10 months in UK and one month in Denmark. 立. In this study, we focus on the inflation effects. The inflation responds. ‧ 國. 學. to balance sheet policy shock with an 0.15% increase in the mean group. ‧. impulse function, reaching the peak after 17 months and returning to. y. Nat. baseline after 35 months.25 The inflation effects of balance sheet policy. er. io. sit. are indeterminate from the mean group impulse response, where the rise of inflation is insufficient. The individual country impulse function of our. al. n. v i n Ch PVAR results reveals the heterogeneous inflation response cross-country. engchi U The inflation impulse responses of advanced economies are divergent. The inflation effect of balance sheet policy shock to Germany is at the range from 0.1 to -0.1%, whereas inflation effect of Germany is negligible but lasts more than 35 months. In Belgium, the impulse function indicates that CPI declines to -0.8% in response to the balance sheet policy shocks,. 25. Gambacorta et al. (2014)) indicates that the impact on prices is a temporary effect with a peak increase of 0.08 % while the impact of interest rate shocks on the price level is found to be very sluggish with a peak only after about 2 years or even later.. 45. DOI:10.6814/NCCU201900987.

(46) Germany. Belgium. Bulgaria. Croatia. Cyprus. Denmark. Spain. Finland. France. Greece. Latvia. Lithuania. Italy. Ireland. s. Sweden. Slovenia. sit. Slovak Republic. n. al. er. io. United Kingdon. Poland. ‧. Romania. Austria. Netherland. Nat. Portugal. 學. Melta Luxembourg Luxembourg. ‧ 國. 立. 政治大. y. Hungary. Ch. engchi. i n U. v. Note: Horizon is monthly, the dotted area is the 16th and 84th bootstrap percentiles of individual country, and the shadow area is the 16th and 84th bootstrap percentiles of mean group.. Figure 8 The central bank asset impulse functions of European Union countries 46. DOI:10.6814/NCCU201900987.

(47) Germany. Belgium. Bulgaria. Croatia. Cyprus. Denmark. Spain. Finland. France. Greece. Ireland. Italy. Latvia. Lithuania. 政治大. Poland. s. Sweden. Slovenia. Slovak Republic. sit. n. al. er. io. United Kingdon. Austria. ‧. Romania. Netherland. Nat. Portugal. Melta. 學. Luxembourg. ‧ 國. 立. y. Hungary. Ch. engchi. i n U. v. Note: Horizon is monthly, the dotted area is the 16th and 84th bootstrap percentiles of individual country, and the shadow area is the 16th and 84th bootstrap percentiles of mean group.. Figure 9 The inflation impulse functions of European Union countries 47. DOI:10.6814/NCCU201900987.

(48) Hungary. Bulgaria. Spain. Finland. Ireland. ‧ 國. Greece. Lithuania. Poland. Slovenia. Sweden. Slovak Republic. sit. io. al. n. United Kingdon. Austria. Cyprus. ‧. Romania. Latvia. 學. Portugal. 政治大. Netherlands. Nat. Melta. France. Italy. 立 Luxembourg. Croatia. y. Denmark. Belgium. er. Germany. Ch. engchi. i n U. v. Note: Horizon is monthly, the dotted area is the 16th and 84th bootstrap percentiles of individual country, and the shadow area is the 16th and 84th bootstrap percentiles of mean group.. Figure 10 The output growth impulse functions of European Union countries 48. DOI:10.6814/NCCU201900987.

(49) Belgium. Bulgaria. Croatia. France. Denmark. Spain. Finland. Hungary. Ireland. Italy. 政治大. Lithuania. Austria. Poland. s. Sweden. Slovenia. sit. Slovak Republic. n. al. er. io. United Kingdon. Greece. ‧. Romania. Netherland. Nat. Portugal. Melta. 學. Luxembourg. ‧ 國. 立. Cyprus. Latvia. y. Germany. Ch. engchi. i n U. v. Note: Horizon is monthly, the dotted area is the 16th and 84th bootstrap percentiles of individual country, and the shadow area is the 16th and 84th bootstrap percentiles of mean group.. Figure 11 The stock market impulse functions of European Union countries 49. DOI:10.6814/NCCU201900987.

(50) nearby country – Luxembourg has similar reaction as its CPI decreases to 0.4% about 10 months later. The CPI hits the bottom about 15 months later, and return to the baseline about 35 months. On the contrary, the impulse response of France and Netherlands are different. The impulse response of France attains the peak of 0.2% about 7 months and return to the baseline around 20 months later. Netherlands reaches the peak of 0.6% about 15 months, and return to baseline about 25 months later. The countries undergoing European sovereign debt crisis results in three completely different cases. The inflation impulse responses of Spain. 政治大 and Italy lower to -0.3% after hitting the bottom for 5 months, whereas 立. Italy hits the bottom after 10 months. Cyprus and Ireland respond to. ‧ 國. 學. balance sheet policy shocks with a short upsurge after 1 to 3 months, then. ‧. the responses lower to -0.4% and -0.6% respectively and gradually. For. y. Nat. Greece and Portugal, they respond to the shocks with a rise of CPI to the. er. io. sit. peak of 0.65% after 15 months and 35 months respectively. About the recently joined member countries, Latvia was notable that its inflation. al. n. v i n replies to the shocks with anCescalation the highest upsurge response h e n gtoc 2%, hi U. among the EU countries.26 Lithuanian CPI answers to the shocks with an increase of 0.8% about 12 months later, while Malta with an increase of 0.4% after 5 months. Slovenia and Slovakia respond with decadent inflation levels, where Slovenian bottom is -0.6% and Slovakian is -0.4%. The replies of UK and Denmark, owning to their opt-out of the single currency agreement, are dissimilar. The inflation level of UK respond to 26. From official website of ECB, we define the recently joined euro area countries as those entry euro area after the onset of euro at Jan. 1st 2002. Slovenia adopted euro at Jul. 11rd 2006. Then, Cyprus and Malta adopted euro at Jul. 10st 2007. Later, Slovakia and Estonia joined at Jul. 8th 2008 and Jul. 13th 2010 respectively. At the last, Latvia and Lithuania respectively joined euro area at Jul. 9th 2013 and Jul. 23th 2014.. 50. DOI:10.6814/NCCU201900987.

(51) shocks with an upsurge to 0.25% after 4 months and return to baseline after 10 months, while Denmark responding the shocks with a short ambiguous upsurge and decreasing gradually to -0.1% about 20 months later. For the newly EU member country, Bulgaria answer the shocks with an instant upsurge to 0.5% and return to zero about 10 month later, while the peak of Romania is 0.4% and lasting for more than 35 months. 27 The central European Countries, i.e., the Czech Republic, Hungary and Poland, conduct interest rate policy and do not adopt euro. The Polish inflation response decrease to -0.5% about 10 months later, after the shocks imposed,. 政治大 while the Hungary react to the shocks with an indefinite inflation rise. 立. It is notable that the results of inflation impulse function revealing that. ‧ 國. 學. the balance sheet responses of non-euro area countries to the balance sheet. ‧. policy shocks are no less than euro countries. Although the mean group. y. Nat. impulse function in figure 9 exhibits the response of overall national. er. io. sit. central bank assets to balance sheet policy shock are 0.06% in the peak, the non-euro country responses, from the individual EU country impulse. al. n. v i n thanCeuro responses. h e ncountry h gc i U. functions, are no less. Even the non-euro. countries which did not adopt balance sheet policy have the same degree of responses. As we mentioned early, balance sheet policy is “conventional” open market operation of central banks. The results uncover that the central bank assets of non-euro countries also have instant responses after the crisis.. 27. From official website of EU, we define the newly EU member countries are Bulgaria, Romania and Croatia. Bulgaria and Romania joined at Jan. 1st 2000, and then Croatia join at Jul. 1th 2013.. 51. DOI:10.6814/NCCU201900987.

(52) 3.2 European Union Cross-Countries Evidence: Panel Data Results. Next, we use panel data model to further look into the relations between inflation and variables, which constituting the PVAR model in the preceding section. We prefer panel data in fixed-effect model for several reasons. First, we aim to investigate the cross-countries heterogeneous responses to the expansionary of monetary base, a cross-sectional estimation is more adequate. Second, a fixed-effect model is more sufficient to detect the individual attribute of the cross-section observations. 政治大. to one specific focus which is allowed to be correlated with the explanatory. 立. variable and have the power to explain the outcome of estimation. As we. ‧ 國. 學. shown in the first chapter, the indicators of monetary base and broad money M3 was increasing disproportionately. The empirical evidence is. ‧. counterintuitive. In particular, Grauwe and Polan (2005) run a cross-. sit. y. Nat. country estimation, which using yearly data, and find a significant almost. er. io. proportional relation between money growth rate and inflation, especially. n. in those high-inflationa countries. Even though vtheoretical literatures. i l C n h ebetween emphasize the tight relationship i U level and money supply, n g c hprice. Koo (2011) further suggest that the gap between money supply (M3) and monetary base is expanded in major economies after the onset of the crisis, is owing to balance sheet recession which are triggered by the private sector debt minimization.28 Meanwhile, conventional monetary policy is not decoupled when central bankers of EU countries deal with the financial turmoil. It is needed 28. As Anderson (2006) indicate that the monetary base is carelessly defined by some authors as currency held by the public plus the cash reserves of banks in his draft. Such definitions may lead to confusion, and a correct definition must include all base money held by banks, not solely the portion held to satisfy regulatory reserve requirements.. 52. DOI:10.6814/NCCU201900987.

(53) to use interest rate observations as explanatory variables. Besides, there are 4 variable constructing the benchmark PVAR model, CPI is the dependent variable of panel data and the rest of variables are placed as explanatory variables. In the preceding estimation, we apply the model of Gambacorta et al. (2014) to 28 EU countries for a longer sample period and have the impulse response functions after the balance sheet policy shocks. We do not find the effects of balance sheet policy shock conspicuous in the longer span data set. Instead, we find that the peak values of responses are smaller,. 政治大 the first chapter, inquiries arise with regard to the causal relations between 立 but more persistent in our model in the longer time span. As discussed in. the disproportionate money supply increase and the easing inflation. ‧ 國. 學. pressure after injecting massive high-power money into financial system.. ‧. Thus, we estimate a fixed-effect model by using monthly observations of. y. Nat. 28 countries data. The fixed-effect model is specified as follow:. er. io. sit. 𝑙𝑛CPI𝑖,𝑡 = 𝛽0 + 𝛽1 𝑙𝑛RGDP𝑖,𝑡 + 𝛽2 𝑙𝑛MB𝑖.𝑡 + 𝛽3 𝑙𝑛M3𝑖,𝑡 + 𝛽4 𝑙𝑛TA𝑖,𝑡 +𝛽5 𝑙𝑛SI𝑖,𝑡 +𝛽6 𝑙𝑛PR 𝑖.𝑡 + 𝜖𝑖,𝑡. n. al. iv. (4). C hindex, RGDP representing where CPI is consumer price real GDP, MB Un engchi. representing monetary base, M3 representing board money, TA representing total assets, SI representing stock market price index, PR representing policy rate, 𝛽1 ⋯ 𝛽6 are parameters to be estimated, and ε is an error term. All data were taken from national central banks and Datastream.29 Before the estimated, we use the LLC and ADF-Fisher test for all the variables of 28 countries, i.e., CPI, RGDP, MB, M3, TA, SI, and 29. The observations of variable MB are gather from DataStream, some are monetary base, base money, or money supply M0 which are sum of currency in circulation plus the outstanding amounts of liabilities of financial institutions which having moneyness or liquidity in board definition, and all the time series of variables are computed first difference and fit to the model.. 53. DOI:10.6814/NCCU201900987.