Publications

There are recurring claims in the public debate and the media that central banks (including the ECB) do not pay sufficient attention to the money supply and therefore have overlooked the inflation surge in 2022–23. This article therefore examines why central banks in advanced economies no longer regulate the money supply and what factors are driving changes in the relationship between the money supply and the inflation. The analysis has revealed a highly volatile and at times even negative empirical relationship between the money supply and the future inflation in Lithuania and across the euro area. However, this relationship may temporarily strengthen during periods of elevated inflation, such as in 2022–23. Monetary policy and fiscal support enabled businesses and households to weather the supply and income shocks caused by the COVID-19 crisis, as well as the surge in energy and food prices following Russia’s war against Ukraine. Policymakers had to make decisions in real time amid considerable uncertainty, and the risk of under-stimulating the economy was extremely high and could have been very costly. Although the recently elevated risk of supply shocks underscores the need to pay due attention to money supply growth and its underlying drivers, the money supply is no longer a suitable primary guide for monetary policy in advanced economies. Based on a comprehensive analysis and projections of a wide range of indicators, including the money supply, the ECB adopts monetary policy decisions aimed at maintaining inflation at its 2% medium-term target in the euro area.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Available only in Lithuanian

Existing research on monetary policy communication has mainly focused on the textual content of press-conference transcripts, while studies on voice sentiments remain limited. We advance the relevant literature by leveraging advanced audio analysis techniques, a large language model and high-frequency financial market data at the one-second frequency, to provide new insights into the changing communication features during ECB press conferences. We evaluate ECB communication across different topics and sample periods, and assess their impacts on euro area financial markets between 2012 and 2024. Voice analysis reveals that our model distinguishes valence, arousal and dominance features with relative accuracy. The regression results indicate that communication regarding the broader economic outlook and inflation triggers stronger and more widespread market responses than the topic of monetary policy measures. At the same time, the text sentiments and arousal-valence feature of voice generate a much higher number of significant effects compared to the voice dominance characteristic. These findings illustrate the importance of audio analysis in explaining monetary policy communication messages and in internalizing the nuanced central bank communication with its heterogeneous impact on financial markets.

Keywords: ECB, euro area, audio analysis, monetary policy, communication, sentiment analysis, financial markets.

JEL codes: C80, E43, E44, E58, G14.

The goal of this paper is to determine the heterogeneity in communication among the ECB Governing Council members, employing the GPT language model, and assess its impact on financial markets with high-frequency data since 2014. Our findings uncover trends in sentiments and topics in line with economic developments and similar studies. We highlight a marked divergence between hawkish and dovish members. Using regression analysis, we demonstrate that the communication from the Governing Council members significantly influences various euro area asset classes, particularly Italian sovereign bonds. These effects are consistently significant across different periods. Our study also highlights specific topics that exert a more pronounced influence on market dynamics, notably unconventional monetary policy since 2014 and, more recently, interest rate discussions. Hawkish communication is observed to have a more substantial effect on sovereign bond yields. Furthermore, speeches by Executive Board members and the Governors of Germany, France and Austria are found to have the most significant overall impact on euro area markets.

Keywords: ECB, monetary policy, communication, sentiment analysis, euro area, financial markets.

JEL codes: C80, E43, E44, E58, G14.

We provide evidence regarding how European and U.S. macroeconomic and monetary policy events affect euro area markets. By analyzing over 170 macroeconomic indicators from 2002 to 2024Q1, we assess the impacts across different events, countries, and time periods. We rely on a high-frequency impact identification strategy and estimate the effects of releases on market variability and the directional effects of surprises across different markets. We find that, compared to European data releases, U.S. events tend to have a more pronounced effects on euro area markets. On average, monetary and employment events induce the strongest repricing in euro area financial markets. In most of the specifications, long-term sovereign yields were more sensitive to macroeconomic releases than other instruments, while short-term bonds and stock prices were impacted much less frequently.

Keywords: macroeconomic news, macroeconomic releases, monetary policy, euro area, financial markets.

JEL codes: E43, E44, F40, G12, G14, G15

We estimate a large number of alternative monetary policy reaction functions for the ECB in order to robustly ascertain whether fiscal stance matters for the conduct of monetary policy. We use the GMM and SVAR methods to estimate inflation-output reaction functions with and without a fiscal deficit indicator from 2001 until 2022 using the thick-modelling approach. The results reveal that the actions of the ECB have exhibited desirable effects on stabilising monetary policy, and have generally been found to be consistent with the Taylor principle. Most importantly, the projected euro area fiscal deficit is usually not statistically significant in explaining the ECB’s stance on monetary policy. Nevertheless, when the fiscal deficit indicator is statistically significant, the sign of its coefficient is always positive, implying that increasing deficits lead to a more restrictive monetary policy stance. These findings speak against the fiscal dominance regime in the euro area, where monetary policy is single and fiscal policies are decentralised. The results remain qualitatively similar independent of the precise specification of the GMM and SVAR models or whether the sample period is shortened to only 2012–2022.

Keywords: ECB, monetary policy, reaction function, Taylor rule, fiscal deficits, fiscal stance.

JEL Classification: E43; E52; E58; E61; E62; H62.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

In this paper we examine multiple dimensions of ECB monetary policy communication by identifying its sentiment and relation with the economic environment and financial markets. We quantify communication sentiment using transcripts from official ECB communication events – press conferences, accounts and Executive Board speeches – as well as media reactions that highlight the key messages of those events. Importantly, we create unique lexicons for both of those communication types. We find that the overall trends in the sentiment indices for the analysed communication events closely resemble the movements of monetary policy stance as well as macroeconomic indicators in the euro area, both before and after the COVID-19 shock period. The communication tone generally shifts in advance of actual monetary policy actions. Using regression analysis, we find some expected, statistically significant effects of press confer-ence sentiment on bank stock prices (information-type shock) and identify the impact of Executive Board speeches on euro area fiscal borrowing costs (short-term OIS rates). Fragmentation issues among euro area member states do not seem to be negatively affected by the sentiments of the ECB’s communication. Still, policy makers should be aware that the tone of their communication events is likely to affect particular financial markets.

Keywords: ECB, monetary policy, communication, sentiment analysis, euro area, financial markets.

JEL Codes: C80, E43, E44, E58, G14.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Communication issues in central banking are important for maintaining the transparency of decisions and preparing financial markets for future changes in monetary policy. This study aims to determine what impact ECB monetary policy communication has on sovereign yields in the euro area on an intraday basis. We analyze different types of ECB monetary policy communication events: ECB monetary policy decisions, press conferences, accounts, and speeches made by Executive Board members. With the help of OLS and panel regression, we study how these communication events and control variables affect the intraday yield changes of major euro area sovereign and overnight index swap markets since 2014. The results from the baseline regression reveal that all four types of analyzed ECB monetary policy communication events have been affecting yields of the largest euro area sovereigns, with ECB decisions and press conferences showing the most substantial impact. Countries with the highest debt levels (such as Italy, Spain, and France) experienced the most robust changes in fiscal costs from ECB communication events, while the German bund market seems less affected. However, the period encompassing the economic shock induced by the Covid-19 pandemic shows much weaker effects, while Executive Board members who have been in charge since the start of the sample period of 2014 seem to have a much more substantial impact on euro area yields than more recent members. Sovereign yields bear the most decisive impact from media articles covering speeches’ topics of unconventional monetary policy measures and, to a smaller extent, interest rates and monetary policy targets.

JEL Codes: C80, E43, E44, E58, G12.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

This paper examines changing ECB communication and how it has impacted euro area financial markets over the past two decades. We applied a combination of topic modelling and sentiment analysis for over 2000 public ECB Executive Board member speeches, as well as over 200 ECB press conferences. Topic analysis revealed that the ECB’s main focus has shifted from strategy and objectives, at the inception of the euro area, to various policy actions during the global financial crisis and, more recently, to instruments and economic developments. Sentiment analysis showed an expected trend of a more negative communication tone during periods of turmoil and a gradual shift to a more dovish monetary policy tone over time. Regression analysis revealed that sentiment indices had the expected impact on financial market indicators, while press conferences showed substantially stronger effects than speeches.

JEL Codes: C80, E43, E44, E58, G12.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Using two different methodologies, we estimate time-varying natural real rates of interest for a majority of euro area (EA) countries, including Lithuania. We find that natural real rates have been declining, particularly since 2008, albeit to different extent across EA countries. Lower rates could (at least partly) be explained by lower productivity and population growth. In line with previous literature, we find evidence of a substantial dispersion of the natural interest rate across EA economies. This became especially evident during the financial crisis of 2008-2009 and the sovereign debt crisis of 2010-2012, while estimates of natural rates tend to converge during "calm" periods. Estimates of natural rates for Lithuania were significantly above the estimates of core EA countries over 2002-2008, but this has changed after the crisis. From 2011 the estimates of natural rates for Lithuania tend to be close to the average for EA countries.

JEL Codes: C32, E32, E43, E52.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

This paper examines the impact of the euro adoption on the economy of Lithuania during its first five years (2015-2019) as a member of the euro area. First, it assesses the impact of the euro adoption in Lithuania on interest rates and real exports, after which it investigates the impact on Lithuanian macroeconomic indicators with a LTDSGE model, using impulse response functions obtained in 2013 in research conducted by the Bank of Lithuania. The paper further estimates the impact of the euro adoption on Lithuanian macroeconomic indicators using the synthetic control method (SCM). The results of this paper confirm the main conclusions of the aforementioned 2013 study, namely, that the long-term benefits of the euro adoption were much higher than the costs, which were mainly short-term or could even be considered as valuable investments. 

JEL Codes: E17, E52, F33, F45

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Available only in Lithuanian

The aim of this paper is to assess how relevant is the topic of sovereign bond valuations in official ECB Executive Board member speeches and, in particular, under what circumstances do ECB officials begin communicating the driving factors of sovereign bond pricing. For this purpose, we downloaded over 2000 public ECB Executive Board member speeches and applied various text mining techniques. The visual analysis revealed that the importance of the topic of sovereign bond pricing and related risk factors in ECB officials’ speeches has greatly fluctuated over time. The main structural break points were linked to the financial market turbulences, but this topic, possibly due to the introduction of sovereign bond purchases, remained relatively popular even after stress episodes. The linkages between the publicly communicated terms of sovereign bond pricing and related risk factors were rather complex and change in respect to the market situation. Meanwhile, the sentiment balance of the credit risk factor was usually on the negative side, while the ones of other terms were much more neutral.

JEL Codes: C80, E43, E58, G12.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

In this paper, we analyze the relationship between various risk factors and euro area government bond yield spreads, focusing particularly on the monetary policy stance. Our results show that credit and common risk factors are consistently priced in government bond yield spreads, while liquidity differentials are relevant especially during periods of stressed market conditions. We demonstrate that the liquidity component has been more prominent during periods of declining interest rates and increasing reserves, while it has diminished on announcement days of monetary policy decisions related to PSPP. Overall, the liquidity component has been statistically insignificant since the announcement of accommodative non-standard monetary policy measures.

JEL Codes: C23, E62, H50.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.