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Fabiani, J., Fidora, M., Setzer, R., Westphal, A., Zorell, N. Sudden Stops and Asset Purchase Programmes in the Euro Area. Credit and Capital Markets – Kredit und Kapital, 54(3), 375-421. https://doi.org/10.3790/ccm.54.3.375
Fabiani, Josefina; Fidora, Michael; Setzer, Ralph; Westphal, Andreas and Zorell, Nico. "Sudden Stops and Asset Purchase Programmes in the Euro Area" Credit and Capital Markets – Kredit und Kapital 54.3, 2021, 375-421. https://doi.org/10.3790/ccm.54.3.375
Fabiani, Josefina/Fidora, Michael/Setzer, Ralph/Westphal, Andreas/Zorell, Nico (2021): Sudden Stops and Asset Purchase Programmes in the Euro Area, in: Credit and Capital Markets – Kredit und Kapital, vol. 54, iss. 3, 375-421, [online] https://doi.org/10.3790/ccm.54.3.375

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Sudden Stops and Asset Purchase Programmes in the Euro Area

Fabiani, Josefina | Fidora, Michael | Setzer, Ralph | Westphal, Andreas | Zorell, Nico

Credit and Capital Markets – Kredit und Kapital, Vol. 54 (2021), Iss. 3 : pp. 375–421

Additional Information

Article Details

Author Details

Josefina Fabiani, The University of Manchester.

Michael Fidora, European Central Bank.

Ralph Setzer, European Central Bank.

Andreas Westphal, European Central Bank.

Nico Zorell, European Central Bank.

References

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  38. Krishnamurthy, A./Vissing-Jorgensen, A. (2011): The effects of quantitative easing on interest rates: channels and implications for policy. Brookings Papers on Economic Activity, Vol. 42(2 (Fall), 215–287.  Google Scholar
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  51. Neely, C. J. (2015): Unconventional monetary policy had large international effects. Journal of Banking & Finance, Vol. 52(C), 101–111.  Google Scholar
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  54. Afonso, A./Arghyrou, M. G./Gadea, M. D./Kontonikas, A. (2018): “Whatever it takes” to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects. Journal of International Money and Finance, Vol. 86(C), 1–30.  Google Scholar
  55. Alcidi, C./Capolongo, A./Gros, D./Musmeci, R./Jahn, M. (2020): Developments in EU Capital Flows in the Global Context. Technical report, European Commission.  Google Scholar
  56. Altavilla, C./Carboni, G./Motto, R. (2015): Asset purchase programmes and financial markets: lessons from the euro area. ECB Working Paper 1864, European Central Bank.  Google Scholar
  57. Andrade, P./Breckenfelder, J./De Fiore, F./Karadi, P./Tristani, O. (2016): The ECB’s asset purchase programme: an early assessment. ECB Working Paper 1956, European Central Bank.  Google Scholar
  58. Bandaogo, M. S./Chen, Y. (2020): Duration of sudden stop spells: a hazard model approach. Review of International Economics, Vol. 28(1), 105–118.  Google Scholar
  59. Beck, R./Fidora, M. (2008): The impact of sovereign wealth funds on global financial markets. Review of European Economic Policy, Vol. 43(6), 349–358.  Google Scholar
  60. Belke, A./Volz, U. (2018): Capital flows to emerging market and developing economies: global liquidity and uncertainty versus country-specific pull factors. Working Paper 23/2018, Deutsches Institut für Entwicklungspolitik.  Google Scholar
  61. Bergant, K./Fidora, M./Schmitz, M. (2020): International capital flows at the security level: evidence from the ECB’s asset purchase programme. IMF Working Paper 2020/046, International Monetary Fund.  Google Scholar
  62. Bindseil, U./König, P. J. (2012): TARGET2 and the European sovereign debt crisis. Credit and Capital Markets, Vol. 45(2), 135–174.  Google Scholar
  63. Bordo, M. D./Cavallo, A. F./Meissner, C. M. (2010): Sudden stops: determinants and output effects in the first era of globalization, 1880–1913. Journal of Development Economics, Vol. 91(2), 227–241.  Google Scholar
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  65. Bussiere, M./Fratzscher, M. (2002): Towards a new early warning system of financial crises. ECB Working Paper 145, European Central Bank.  Google Scholar
  66. Calderon, C./Kubota, M. (2013): Sudden stops: are global and local investors alike? Journal of International Economics, Vol. 89(1), 122–142.  Google Scholar
  67. Calvo, G./Reinhart, C. (2000): When capital inflows suddenly stop: consequences and policy options. In Reforming the international monetary and financial system. International Monetary Fund.  Google Scholar
  68. Calvo, G. A./Izquierdo, A./Mejia, L.-F. (2008): Systemic sudden stops: the relevance of balance-sheet effects and financial integration. NBER Working Paper 14026, National Bureau of Economic Research.  Google Scholar
  69. Cavallo, E./Powell, A./Pedemonte, M./Tavella, P. (2015): A new taxonomy of sudden stops: which sudden stops should countries be most concerned about? Journal of International Money and Finance, Vol. 51, 47–70.  Google Scholar
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  71. Chari, A./Stedman, K. D./Lundblad, C. (2017): Taper tantrums: QE, its aftermath and emerging market capital flows. NBER Working Paper 23474, National Bureau of Economic Research.  Google Scholar
  72. Chhaochharia, V./Laeven, L. (2008): Sovereign wealth funds: their investment strategies and performance. CEPR Discussion Paper 6959, Centre for Economic Policy Research.  Google Scholar
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  76. Davis, J. S./Valente, G./Van Wincoop, E. (2021). Global drivers of gross and net capital flows. Journal of International Economics, 128.  Google Scholar
  77. De Santis, R. A. (2020). Impact of the asset purchase programme on euro area government bond yields using market news. Economic Modelling, Vol. 86(C), 192–209.  Google Scholar
  78. Edwards, S. (2004): Financial openness, sudden stops, and current-account reversals. American Economic Review, Vol. 94(2), 59–64.  Google Scholar
  79. Edwards, S. (2007). Capital controls, capital flow contractions, and macroeconomic vulnerability. Journal of International Money and Finance, Vol. 26(5), 814–840.  Google Scholar
  80. Eichengreen, B./Gupta, P. (2018): Managing sudden stops. In Mendoza, E. G./Pastén, E./Saravia, D., editors, Monetary policy and global spillovers: mechanisms, effects and policy measures, volume 25 of Central Banking, Analysis, and Economic Policies Book Series, chapter 2, 009–047. Central Bank of Chile.  Google Scholar
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  82. Fagan, G./McNelis, P. D. (2020): Sudden stops in the euro area: does Monetary Union matter? Journal of International Money and Finance, Vol. 108, 102–163.  Google Scholar
  83. Forbes, K. J./Warnock, F. E. (2012): Capital flow waves: surges, stops, flight, and retrenchment. Journal of International Economics, Vol. 88(2), 235–251.  Google Scholar
  84. Forbes, K. J./Warnock, F. E. (2021): Capital flow waves – or ripples? Extreme capital flow movements since the crisis. Journal of International Money and Finance, Vol. 116, 102394.  Google Scholar
  85. Ghosh, A. R./Ostry, J. D./Qureshi, M. S. (2018): Taming the tide of capital flows: a policy guide. MIT Press Books. The MIT Press.  Google Scholar
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  88. Ilzetzki, E., Reinhart, C. M., and Rogoff, K. S. (2019). Exchange arrangements entering the twenty-first century: which anchor will hold? Quarterly Journal of Economics, Vol. 134(2), 599–646.  Google Scholar
  89. International Monetary Fund (2012). The liberalization and management of capital flows: an institutional view. Policy Paper 196, International Monetary Fund.  Google Scholar
  90. Jevcak, A./Setzer, R./Suardi, M. (2010): Determinants of capital Flows to the new EU Member States before and during the financial crisis. Economic Papers 425, European Commission.  Google Scholar
  91. Krishnamurthy, A./Vissing-Jorgensen, A. (2011): The effects of quantitative easing on interest rates: channels and implications for policy. Brookings Papers on Economic Activity, Vol. 42(2 (Fall)), 215–287.  Google Scholar
  92. Krugman, P. (2014): Currency regimes, capital flows, and crises. IMF Economic Review, Vol. 62(4), 470–493.  Google Scholar
  93. Lane, P. R. (2013): Capital flows in the euro area. CEPR Discussion Paper 9493, Centre for Economic Policy Research.  Google Scholar
  94. Lane, P. R./McQuade, P. (2014). Domestic credit growth and international capital flows. Scandinavian Journal of Economics, Vol. 116(1), 218–252.  Google Scholar
  95. Lane, P. R./Milesi-Ferretti, G. M. (1999): The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries. CEPR Discussion Paper 2231, Centre for Economic Policy Research.  Google Scholar
  96. Lane, P. R./Milesi-Ferretti, G. M. (2007): The external wealth of nations mark ii: revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of International Economics, 73.  Google Scholar
  97. Lane, P. R./Milesi-Ferretti, G. M. (2012): External adjustment and the global crisis. Journal of International Economics, Vol. 88(2), 252–265.  Google Scholar
  98. Lane, P. R./Pels, B. (2012): Current account imbalances in Europe. CEPR Discussion Paper 8958, Centre for Economic Policy Research.  Google Scholar
  99. Lu, Y./Wang, Y. (2019): Determinants of currency composition of reserves: a portfolio theory approach with an application to RMB. IMF Working Paper 2019/052, International Monetary Fund.  Google Scholar
  100. Martin, R./Schuknecht, L./Vansteenkiste, I. (2007): The role of the exchange rate for adjustment in boom and bust episodes. ECB Working Paper 813, European Central Bank.  Google Scholar
  101. Merler, S./Pisani-Ferry, J. (2012): Sudden stops in the euro area. Policy Contributions 718, Bruegel.  Google Scholar
  102. Milesi-Ferretti, G. M./Razin, A. (1998): Sharp reductions in current account deficits: an empirical analysis. European Economic Review, Vol. 42(3–5), 897–908.  Google Scholar
  103. Moessner, R. (2018): Effects of asset purchases and financial stability measures on term premia in the euro area. Applied Economics, Vol. 50(43), 4617–4631.  Google Scholar
  104. Neely, C. J. (2015): Unconventional monetary policy had large international effects. Journal of Banking & Finance, Vol. 52(C), 101–111.  Google Scholar
  105. Neri, S./Siviero, S. (2018): The non-standard monetary policy measures of the ECB: motivations, effectiveness and risks. Credit and Capital Markets, Vol. 51(4), 513–560.  Google Scholar
  106. Schnabl, G. (2021). Macroeconomic policy making and current account imbalances in the Euro Area. Credit and Capital Markets.  Google Scholar
  107. Afonso, A./Arghyrou, M. G./Gadea, M. D./Kontonikas, A. (2018): “Whatever it takes” to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects. Journal of International Money and Finance, Vol. 86(C), 1–30.  Google Scholar
  108. Alcidi, C./Capolongo, A./Gros, D./Musmeci, R./Jahn, M. (2020): Developments in EU Capital Flows in the Global Context. Technical report, European Commission.  Google Scholar
  109. Altavilla, C./Carboni, G./Motto, R. (2015): Asset purchase programmes and financial markets: lessons from the euro area. ECB Working Paper 1864, European Central Bank.  Google Scholar
  110. Andrade, P./Breckenfelder, J./De Fiore, F./Karadi, P./Tristani, O. (2016): The ECB’s asset purchase programme: an early assessment. ECB Working Paper 1956, European Central Bank.  Google Scholar
  111. Bandaogo, M. S./Chen, Y. (2020): Duration of sudden stop spells: a hazard model approach. Review of International Economics, Vol. 28(1), 105–118.  Google Scholar
  112. Beck, R./Fidora, M. (2008): The impact of sovereign wealth funds on global financial markets. Review of European Economic Policy, Vol. 43(6), 349–358.  Google Scholar
  113. Belke, A./Volz, U. (2018): Capital flows to emerging market and developing economies: global liquidity and uncertainty versus country-specific pull factors. Working Paper 23/2018, Deutsches Institut für Entwicklungspolitik.  Google Scholar
  114. Bergant, K./Fidora, M./Schmitz, M. (2020): International capital flows at the security level: evidence from the ECB’s asset purchase programme. IMF Working Paper 2020/046, International Monetary Fund.  Google Scholar
  115. Bindseil, U./König, P. J. (2012): TARGET2 and the European sovereign debt crisis. Credit and Capital Markets, Vol. 45(2), 135–174.  Google Scholar
  116. Bordo, M. D./Cavallo, A. F./Meissner, C. M. (2010): Sudden stops: determinants and output effects in the first era of globalization, 1880-1913. Journal of Development Economics, Vol. 91(2), 227–241.  Google Scholar
  117. Broner, F./Didier, T./Erce, A./Schmukler, S. L. (2013): Gross capital flows: dynamics and crises. Journal of Monetary Economics, Vol. 60, 113–133.  Google Scholar
  118. Bussiere, M./Fratzscher, M. (2002): Towards a new early warning system of financial crises. ECB Working Paper 145, European Central Bank.  Google Scholar
  119. Calderon, C./Kubota, M. (2013): Sudden stops: are global and local investors alike? Journal of International Economics, Vol. 89(1), 122–142.  Google Scholar
  120. Calvo, G. A./Izquierdo, A./Mejia, L.-F. (2008): Systemic sudden stops: the relevance of balance-sheet effects and financial integration. NBER Working Paper 14026, National Bureau of Economic Research.  Google Scholar
  121. Calvo, G./Reinhart, C. (2000): When capital inflows suddenly stop: consequences and policy options. In Reforming the international monetary and financial system. International Monetary Fund.  Google Scholar
  122. Cavallo, E. A./Frankel, J. A. (2008): Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality. Journal of International Money and Finance, Vol. 27(8), 1430–1452.  Google Scholar
  123. Cavallo, E./Powell, A./Pedemonte, M./Tavella, P. (2015): A new taxonomy of sudden stops: which sudden stops should countries be most concerned about? Journal of International Money and Finance, Vol. 51, 47–70.  Google Scholar
  124. Chari, A./Stedman, K. D./Lundblad, C. (2017): Taper tantrums: QE, its aftermath and emerging market capital flows. NBER Working Paper 23474, National Bureau of Economic Research.  Google Scholar
  125. Chhaochharia, V./Laeven, L. (2008): Sovereign wealth funds: their investment strategies and performance. CEPR Discussion Paper 6959, Centre for Economic Policy Research.  Google Scholar
  126. Chinn, M. D./Ito, H. (2006): What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics, Vol. 81(1), 163–192.  Google Scholar
  127. Cœuré, B. (2017): The international dimension of the ECB’s asset purchase programme. Speech at the Foreign Exchange Contact Group meeting, 11 July 2017.  Google Scholar
  128. David, A./Gonçalves, C. E. (2019): In search of lost time: examining the duration of sudden stops in capital flows. IMF Working Paper 2019/230, International Monetary Fund.  Google Scholar
  129. Davis, J. S./Valente, G./Van Wincoop, E. (2021): Global drivers of gross and net capital flows. Journal of International Economics, 128.  Google Scholar
  130. De Santis, R. A. (2020): Impact of the asset purchase programme on euro area government bond yields using market news. Economic Modelling, Vol. 86(C), 192–209.  Google Scholar
  131. Edwards, S. (2004): Financial openness, sudden stops, and current-account reversals. American Economic Review, Vol. 94(2), 59–64.  Google Scholar
  132. Edwards, S. (2007): Capital controls, capital flow contractions, and macroeconomic vulnerability. Journal of International Money and Finance, Vol. 26(5), 814–840.  Google Scholar
  133. Eichengreen, B./Gupta, P. (2018): Managing sudden stops. In Mendoza, E. G./Pastén, E./Saravia, D. (eds.), Monetary policy and global spillovers: mechanisms, effects and policy measures, volume 25 of Central Banking, Analysis, and Economic Policies Book Series, chapter 2, 009-047. Central Bank of Chile.  Google Scholar
  134. Eisenschmidt, J./Kedan, D./Schmitz, M./Adalid, R./Papsdorf, P. (2017): The Eurosystem’s asset purchase programme and TARGET balances. ECB Occasional Paper 196, European Central Bank.  Google Scholar
  135. Fagan, G./McNelis, P. D. (2020): Sudden stops in the euro area: does Monetary Union matter? Journal of International Money and Finance, Vol. 108, 102–163.  Google Scholar
  136. International Monetary Fund (2012). The liberalization and management of capital flows: an institutional view. Policy Paper 196, International Monetary Fund.  Google Scholar
  137. Jevcak, A./Setzer, R./Suardi, M. (2010): Determinants of capital Flows to the new EU Member States before and during the financial crisis. Economic Papers 425, European Commission.  Google Scholar
  138. Krishnamurthy, A./Vissing-Jorgensen, A. (2011): The effects of quantitative easing on interest rates: channels and implications for policy. Brookings Papers on Economic Activity, Vol. 42(2 (Fall), 215–287.  Google Scholar
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Abstract

This paper analyses the incidence and severity of sudden stops in euro area countries before and after the introduction of the ECB’s asset purchase programmes. We define sudden stops as abrupt declines in private net financial inflows, i.e. total flows adjusted for EU and IMF loans and changes in TARGET2 balances. We document that sudden stop were more frequent and more severe in euro area countries compared to other OECD economies over the period 1999–2020. We find that the susceptibility of euro area countries to severe sudden stops mainly reflects domestic fundamentals whereas there is no clear evidence of an adverse direct effect of being part of the euro area. Moreover, our econometric analysis suggests that the ECB asset purchase programmes have overall almost halved the risk of severe sudden stops in euro area countries. We find tentative evidence that this effect operates through confidence channels.