The Impact of Conventional and Unconventional Monetary Policy on Expectations and Sentiment

This paper offers, for the first time, evidence on the effect of ECB's conventional and unconventional monetary policy on economic expectations in Euro-area countries during the US and EU crisis. We employ a range of research methodologies (PVAR, QVAR, FAVAR) in a sample of nine Eurozone countries and combine expectations/sentiment indicators with a set of macroeconomic and financial variables. We find that conventional ECB monetary policy (and Fed's monetary policy stance) has a positive and significant effect on economic expectations for Core Eurozone countries and a weaker effect on Peripheral countries. Our results, however, indicate that the short-term effect of ECB's unconventional measures on economic expectations is negative, although we find a modest correction in the medium-term. The effect of monetary policy shocks (conventional and unconventional) on economic expectations is not uniform across Eurozone countries; it is much stronger for Core Eurozone countries. Further findings indicate the existence of sentiment spill-over effects from the US to Core Eurozone countries during the US financial crisis. Overall, our findings highlight the importance of monetary policy in the determination of economic expectations