A High-Frequency Analysis of Euro Area Monetary Policy : Unveiling the Dynamics During the Covid-19 Pandemic and Beyond (2020-2023)

Abstract

In this master thesis, we investigate the effects of monetary policy surprises in the euro area on key financial indicators from 2020 to 2023, a period marked by the Covid-19 pandemic and other global crises. Our methodology follows that of Altavilla et al. (2019); we first identify factors related to the European Central Bank’s communication strategy, including the Target factor, Timing, Forward Guidance (FG), and Quantitative Easing (QE). Using the Euro Area Monetary Policy Event-Study Database (EA-MPD), we analyze intraday changes in financial variables against European Central Bank (ECB) policy announcements, employing a high-frequency event study to assess the causal impact of these surprises. Finally, we examine information effects by looking at reactions to monetary policy in the stock market. Our findings are mainly consistent with those of Altavilla et al. (2019) for the 2002-2018 period. However, in extending our analysis to 2023 we find marked differences. Firstly, we identify a smaller-than-expected effect of the Target factor on Overnight Index Swap (OIS) yields during the 2020-2023 period, indicating market anticipations to interest rate changes. Secondly, we find a larger impact of the Timing factor during the period of interest, indicating a substantial revision of expectations regarding upcoming monetary decisions. Thirdly, our estimates show that the Quantitative Easing factor significantly influenced key indexes like the Euro Stoxx 50 (STOXX50E) and the Euro Area Bank Stock Market Sub-Index (SX7E), diverging from previous findings and reflecting the period’s extensive fiscal and monetary policies. Finally, our analysis reveals that the market’s response to policy actions during the period in question was predominantly influenced by Odyssean surprises, rather than providing new insights into the economic outlook. This is a notable observation, as it deviates from the usual expectations of increased informational impacts during crises. Typically, one would anticipate a greater prevalence of Delphic surprises in such scenarios, but our findings suggest otherwise. Future research could enhance this analysis through a VAR approach, focusing on policy surprises as external instruments to further explore uncertainty and information effects in monetary policy.