In a recent study conducted by the Bank of Finland, the effects of the European Central Bank’s (ECB) targeted credit easing on the euro area’s economy have been evaluated. The study employs a unique identification approach based on high-frequency web search data, shedding new light on the policy’s impact.
The ECB, like many central banks around the world, resorted to unconventional monetary policy measures to counter the challenges posed by near-zero interest rates in the 2010s. Among these measures, credit easing policies were introduced to directly promote bank lending and stimulate economic activity. The Bank of England initiated this trend with its Funding for Lending Scheme in 2012, and in 2014, the ECB followed suit with its targeted longer-term refinancing operations (TLTROs).
The study’s key findings are as follows:
1. Positive Impact on Bank Lending: The research suggests that the ECB’s TLTROs led to a significant reduction in borrowing costs for banks, which, in turn, encouraged them to increase lending to non-financial corporations. This finding aligns with previous studies that used alternative identification techniques.
2. Boosting Financial Markets: High-frequency data from financial markets reveal that the TLTROs effectively lowered credit spreads, corporate bond yields, and market volatility. Additionally, market-based inflation and bank dividend expectations experienced an uptick.
3. Macro-Level Effects: Credit easing policies, as reflected in the TLTROs, contributed to increased loan volumes, economic growth, and price levels. The study also hints at a broad-based growth in investment.
One of the standout features of this study is its unique identification approach, which leverages public attention to TLTRO-related news. By combining Google search intensity with financial market data, the researchers were able to gauge the impact of credit easing policies more accurately.
The daily policy surprise indicator used in the study captures the intensity of public interest in TLTRO-related news. When market participants begin searching for information about a policy announcement, it indicates a significant policy change. This approach allowed the researchers to separate TLTRO-related surprises from other monetary policy events.
The study’s findings are significant as they provide a comprehensive assessment of the aggregate effects of targeted credit easing in the euro area. It also highlights the importance of using innovative identification techniques to better understand the impacts of central bank policies on financial markets and the broader economy.
The ECB’s use of TLTROs between 2014 and 2021 appears to have played a pivotal role in easing credit conditions, stimulating economic growth, and bolstering bank lending. These findings underscore the importance of targeted monetary policy measures in addressing economic challenges, particularly in times when conventional tools are less effective.