Heterogeneous Effects of Unconventional Monetary Policy on Financial Stability in the Euro Area

The European Central Bank (ECB) has been using unconventional monetary policy (UMP) since 2009, but the set of measures and their scale have varied significantly over the years. Until 2022, the measures were stimulatory and gradually expanded to increase aggregate demand in the economy. However, since 2022, the ECB has been pursuing contractionary UMP to combat inflation. This paper examines the effect of the ECB's UMP on financial stability in the euro area, which has received less attention in empirical studies compared to its macroeconomic effects. The study considers financial stability in each euro area country instead of an aggregate indicator, which determines its scientific novelty. The level of financial stability is measured by the CLIFS financial stress index, which captures volatility in key financial market segments. An indicator of the scale of UMP is the shadow interest rate, which reflects the effects of both interest rate cuts and asset purchases on the ECB balance sheet. The empirical analysis covers the period 2009–2023 and is based on a global vector autoregressive model. The results confirm that the ECB’s UMP reduces financial stress in only half of the euro area countries, including the largest economies and countries with vulnerable levels of public debt. Improving the transmission of unconventional monetary policy into lower risks to financial stability may require a revision of the ECB’s toolkit and an increase in the depth of the euro area countries’ financial markets.