Expectations and quantitative easing in the Eurozone

Abstract

The European economy suffered from both the 2008 financial crisis and the sovereign debt crisis in certain of its members, while it experienced a period of QE starting in 2015. The goal of this study is to explore the direct and exclusive effects of this unconventional monetary policy on financial markets, economic activity, and labor markets across the Eurozone. The analysis employs the Markov-Switching Dynamic Regression method. The findings illustrate the effectiveness of QE to reduce short- and log-term credit spreads, increase stock prices, improve market expectations, recover labor market conditions and economic productivity, with the findings emphasizing the confidence/expectations mechanism as the primary transmission channel of the QE policy.