The role of the expectations channel in the quantitative easing in the Eurozone

The purpose of this paper is to explore the direct and exclusive effects of this rather unconventional monetary policy on financial markets, economic activity and labor markets across the Eurozone.

Using a range of variables, the analysis employed the Markov-switching dynamic regression methodological approach.

The findings provided evidence in favor of the reduction of short- and log-term credit spreads, increased stock prices, improved market expectations, recovered labor market conditions and economic productivity, while the primary transmission channel of the quantitative easing policy is the expectations channel.

The novelties of this paper are twofold: it makes use of a wide data set to investigate the effect of economic and financial variables on productivity, labor markets, bond markets and equity markets in the Eurozone; and the analysis focuses on the direct effects of monetary base increases on the Eurozone economy, as well as on Eurozone financial markets.