SUERF Policy Brief - No 838, March 2024

(2023), we suggest explicitly considering the influence of the Fed's policy stance on the ECB's monetary policy, given the Fed's prominent role in the global financial cycle (Miranda-Agrippino and Rey 2020). [...] This function is bounded between zero and one and incorporates the Fed’s monetary policy stance as an input variable.2 Estimation of the Fed’s monetary policy stance for the nonlinear model We gauge the Fed's monetary policy stance by assessing the deviation of the effective federal funds rate from an estimate of the U. [...] www.suerf.org/policynotes SUERF Policy Brief, No 838 2 ECB’s Monetary Policy in Light of the Fed’s Policy Stance In Figure 1, we present our estimate of the nonlinear transition function (depicted by the gray areas), derived from the input variable - the Fed’s policy stance (shown in red). [...] www.suerf.org/policynotes SUERF Policy Brief, No 838 3 ECB’s Monetary Policy in Light of the Fed’s Policy Stance Figure 2: Impulse response functions of a restrictive monetary policy shock in the euro area for selected real government bond yields in the euro area Notes: The figure shows the responses to a contractionary ECB monetary policy shock on selected real government bond yield changes (matu. [...] Reactions also depend on the respective maturity of government bonds and inflation derivatives, as well as of the percentile of the Fed’s stance Our analysis highlights the significant influence of the Fed's stance on the dynamic responses of euro area financial markets to contractionary monetary surprises, revealing strong evidence of nonlinear interaction effects.