Master’s Thesis Economics – Koen Nederhoff – S3181545 Non-technical summary
Ever since the global financial crisis of 2008, the European Central Bank (ECB) has resorted to unconventional monetary policy to pursue its primary objectives: the maintenance of price stability and sustainable economic growth. The ECB turned to unconventional monetary policy, since the conventional policy instrument, the short-term interest rate, has been at the zero lower bound, making this tool unavailable. Unconventional monetary policy is most often conducted in the form of quantitative easing entailing large-scale asset
purchases, which are believed to be able to affect the yield curve.
Although not of first-order importance when drafting such policies, the manner in which quantitative easing affects the income distribution has received an increased degree of interest in recent years. Evidence for this increased degree of interest can be found in the burgeoning literature being devoted to estimating the effects of quantitative easing on the income distribution. While there are some papers studying these effects in the euro area, they do not do so in the context of the ECB’s Asset Purchase Programme (APP), the most
prominent illustration of quantitative easing in the euro area in recent years.
The transmission channel of monetary policy the majority of the literature inquiring into the effects of monetary policy on the income distribution deems the most important is the employment channel. The employment channel captures the impact of monetary policy on the income distribution through monetary policy’s effect on employment. In the short-term, quantitative easing is expected to widen the income distribution, mainly by increasing asset prices. However, in the medium-term, it has been theorized that quantitative easing mitigates these disequalizing effects through the employment channel, by stimulating employment among low-skilled workers more than employment among high-skilled workers. This statement has yet to be inquired into directly in the context of the APP in the euro area.
Though, it is instrumental that the existence of these effects of the APP are assessed, since only then national policymakers can take the true effects the ECB’s supranational policy into account.
The research question which is formulated to assess the dynamics of the employment channel in the context of the APP is: has the ECB’s Asset Purchase Programme reduced unemployment among low-skilled workers more than that of high-skilled workers? Since evidence that the answer to this question is yes is found for both the US and following earlier
episodes of monetary policy in the euro area, it is believed that this holds in the euro area in context of the APP as well. Hence, the hypothesized answer to this research question is yes.
First, to show that the APP has indeed significantly affected the yield curve, the effects of the APP on the yield curve are estimated. The results from this estimation show that the APP has significantly flattened the yield curve, which means that the APP has
affected the yield curve as intended by the ECB. This flatter yield curve should lead to a more accommodative financial environment, ultimately stimulating economic activity and
mitigating undesirable disinflationary pressures.
Moreover, the effects of the APP on unemployment across different levels of educational attainment are assessed, to see whether low-skilled workers disproportionally benefit from the APP relative to high-skilled workers in terms of their employment status.
The results show that the APP has directly decreased unemployment among low- and high- skilled workers, while unemployment among medium-skilled workers is not significantly affected. What can be inferred from these results is that the APP catalyses the polarization of employment. This polarization of employment entails that, over time, the demand for low- and high-skilled labour increases relative to the demand for medium-skilled labour.
When the total effects of the APP are estimated, only high-skilled workers are shown to be significantly affected by the APP in terms of their employment status. Hence, in the euro area, the employment channel does not play a prominent role in the transmission of the APP’s effects to the income distribution. This deviates from earlier inquiries into the
distributional effects of quantitative easing. One possible explanation for this discrepancy is that this inquiry is focused on the euro area, while the bulk of previous inquiries is focused on the US. Hence, this indicates that there are differences between the transmission of monetary policy between the US and the euro area. Furthermore, the timespan of this study extends itself to 2019Q4. Earlier studies inquiring into the effects of unconventional monetary policy in the euro area extended their timespan to at maximum 2016Q4. Therefore, it can be argued that in recent years, the importance of the employment channel as a transmission channel of monetary policy has decreased in the euro area.
