On the time-varying effects of the ECB’s asset purchases

This paper (re-)evaluates the effectiveness of central bank asset purchases in the euro area given their prominent role in the ECB’s response to the pandemic as well as the evidence from the US suggesting diminishing returns of this policy measure over time. We analyse their macroeconomic impact in the euro area using a time-varying parameter structural vector autoregression with stochastic volatility and perform identification via sign and zero restrictions of Arias et al. (Econometrica 86:658–720, 2018), their fusion with high-frequency information approach akin to Jarociński and Karadi (Am Econ Macroecon 12:1–43, 2020) and a novel method which merges high-frequency identification with narrative sign restrictions of Antonlin-Diaz and Rubio-Ramirez (Am Econ Rev 108:2802–2829, 2018). We find that the potency of the ECB’s asset purchases to lift inflation has indeed considerably declined over time with several factors contributing to a more muted response of prices to central bank asset purchases. Our results show that the reanchoring channel is no longer active while the counterproductive effects via the mechanism outlined in Boehl et al. (Working Paper No. 691, 2020), which we dub the capacity utilization channel, have emerged lately and are further complemented with disinflationary effects stemming from the cost channel. Also, the effects passed through more standard transmission channels of central bank asset purchases like portfolio rebalancing and signalling, while still significant, appear to be less persistent recently. Overall, our findings point to a diminishing return of the ECB’s asset purchases to stabilize inflation and its expectations in the euro area.