An analysis of Eurozone’s low inflation : has the ECB’s monetary policy response to disinflationary pressures been effective?

Abstract

Since 2008, the Euro Area has been faced with a number of episodes which threatened its price stability. The European Central Bank (ECB) has been involved in a continuous fight against the low inflation environment which came to develop over these recent years, by implementing a series of unconventional monetary policy measures which prior to this period have been unprecedented in both size and scope. The aim of this dissertation is to analyse what has been causing Eurozone’s prolonged period of low inflation and whether the ECB monetary policy has been effective in tackling these disinflationary pressures. In this regard, the objective of this study is to test the hypothesis that the implementation of unconventional monetary policy measures by the ECB have had a positive effect on output and inflation. To test this hypothesis, a vector autoregressive (VAR) model capturing monthly data over a sample covering the period from January 2007 to December 2016 is employed. The model includes five variables: inflation rate, ECB balance sheet total assets, industrial production, volatility index, and one moth forward crude oil prices. The results show that the ECB monetary policy’s response to disinflationary pressures has not been effective. This conclusion was not indifferent to conclusions reached by other authors within the relevant literature. To substantiate this conclusion, an extensive discussion of the results provides a comprehensive rationalisation for these findings.