Beware of Fiscal Signalling. The Effects of the Ecb's Fiscal Communication in the Euro Area

This paper investigates how the communicated degree of fiscal policy accommodation (DFPA) of the European Central Bank (ECB) affects the macroeconomy of the euro area as well as how it interacts with government bond surprises. I use a text mining approach to quantify DFPA and local projections to investigate the macroeconomic effects of a fiscally hawkish communication by the ECB. I also run historical decomposition to study the impact of DFPA surprises on the development of output and inflation. Moreover, a proxy Factor-Augmented VAR is set to assess the interface between government bond purchases and the \enquote{fiscal stance} of the ECB. The results are the following. First, I find that a hawkish DFPA shock drives output and inflation down. Second, the fiscal recommendations of the ECB are more effective when governments are constrained by higher rates than at the zero lower bound. Third, I document that output and inflation would have been higher had the ECB held its DFPA constant during the Great Recession and the sovereign-debt crisis. Fourth, I provide evidence that government bond purchases are inversely related to DFPA surprises