Browsing by Subject "unconventional monetary policy"

The turnover of heterogeneous firms has been shown to behave differently at business cycle frequencies. Traditionally it has been noted that the turnover of small firms is more procyclical. The evidence is however less unambiguous when it comes to more recent business cycle contractions, such as the financial crisis. Majority of the literature considers access to credit to be the driving force behind the differences in cyclicality. Due to asymmetrical information banks intermediating credit consider small firms to be riskier than large. During an economic downturn, safe investments are favored and thus the wedge in access to credit between large and small firms increases. The thesis consequently focuses on the impact of supply of credit on firms. More specifically, the study looks at the responses of firms of different size in Finland to unconventional monetary policy shocks by the European Central Bank (ECB). Unconventional monetary policy shocks are identified in several ways in the thesis. All approaches are based on a six-variate vector autoregressive (VAR) model. The euro wide variables are the gross domestic product (GDP), consumer prices, ECB’s balance sheet, financial stress measured by the Composite Indicator of Systemic Stress (CISS), the spread between the EONIA (Euro OverNight Index Average) and main refinancing operations (MRO) rates and the MRO rate. All variables are provided by either the ECB or Eurostat. The series were aggregated or interpolated to a monthly frequency and seasonally adjusted if needed. The turnover data for Finnish firms is from Statistics Finland. Sales inquiry data collected by Statistics Finland is used as the series for large firms. On the other hand, the series for small firms is based on value added tax data, which covers nearly the entire economy. The turnovers of large and small firms enter the baseline model one at a time. The thesis concentrates on a time period during which the unconventional measures have been in place, that is between January 2010 up until December 2018. In the thesis, the impact of unconventional monetary policy measures such as the targeted longer-term refinancing operations and the asset purchase programme is studied through the balance sheet of the ECB. Zero and sign restrictions are used to uncover the structural shocks. In the baseline identification, a shock to the central bank’s balance sheet is assumed to increase the size of the ECB’s balance sheet and decrease financial stress as well as the EONIA-MRO spread for two months. It is additionally assumed that the shock does not have affect GDP, prices and the MRO rate upon impact. The restrictions are implemented through a Bayesian rejection algorithm. The algorithm draws a variance-covariance decomposition from the posterior distribution of the model and checks whether is produces impulse responses that fulfill the restrictions. The results are represented as the median response of the accepted draws. The results indicate that a shock to the balance sheet of the ECB increases the turnovers of both small and large Finnish firms. The positive impact manifests in two stages; it peaks some three months after the shock for the first time and later again. The impact on small firms is at its highest within 12 months of the innovation. The response of the turnover of large firms is less pronounced directly after the shock but lasts for longer. In summary, the results suggest that the impact is stronger for small firms but more persistent for large. Therefore, the thesis concludes that unconventional monetary policy measures have not benefited small Finnish firms disproportionately.