The unconventional measures of monetary policy: a model to test the operating effectiveness

In early 2010, the weakness of public finances in some Eurozone countries and the consequent difficulties for their credit institutions compromised the smooth functioning of the transmission mechanism of monetary policy. In this context, the European Central Bank intervened immediately reintroducing a series of unconventional monetary policy measures. These measures aimed at countering the malfunction of the inter-bank markets and, consequently, ensuring that the effective transmission of monetary impulses were preserved. After a brief summary of the main unconventional measures implemented by the ECB between 2010 and 2012, this study intends to verify if these measures actually contributed to the achievement of those objectives. To this end, an empirical test was developed based on the consideration that the interbank money market conditions of efficiency can be summarized in the dynamics of the Euribor-OIS spread. The latter can be considered a kind of parameter measuring the efficiency of the money market. In other words, an upward trend of that spread can be interpreted as a clear sign of tension, or inefficiency. Conversely the opposite is true. The analysis developed shows that the increase of Euribor-OIS 3m spread was affected by deterioration in the liquidity of the banks. This was mitigated by the non-conventional measures, but especially by growing concerns about their financial soundness. This circumstance therefore limited the effectiveness of the ECB measures, which could help to mitigate the problems related to the lack of liquidity in the interbank market, but were not suited to solving the underlying problems of the solvency of the banks.