THE EFFECTIVENESS OF UNCONVENTIONAL MONETARY POLICY ON RISK AVERSION AND UNCERTAINTY
Leonidas S. Rompolis
Athens University of Economics and Business
Abstract
This paper examines the impact of unconventional monetary policy of ECB measured by its balance sheet expansion on euro area equity market uncertainty and investors risk aversion within a structural VAR framework. An expansionary balance sheet shock decreases both risk aversion and uncertainty at least in the medium-run. A negative shock on policy rates has also a negative impact on risk aversion and uncertainty. These results are generally robust to different specifications of the VAR model, estimation procedures and identification schemes. Conversely, periods of high uncertainty are followed by a looser conventional monetary policy. The effect of uncertainty on ECB’s total assets and of risk aversion on conventional or unconventional monetary policy is not always statistically significant.
JEL-classification: C32; E44; E52; G12
Keywords: Unconventional monetary policy; euro area; risk aversion; uncertainty
Acknowledgements: I would like to thank Heather Gibson, Dimitris Malliaropoulos, Petros Migiakis, Dimitris Louzis and seminar participants at the Bank of Greece for helpful comments and suggestions. The author gratefully acknowledges financial support from the Bank of Greece. The views expressed in this paper do not necessarily reflect those of the Bank of Greece or the Eurosystem.
Correspondence:
Leonidas S. Rompolis
Athens University of Economics and Business
76 Patission street,
10434, Athens, Greece
Tel: +30-2108203465
Email: rompolis@aueb.gr