Spillover Effects of Forward Guidance Shocks: How ECB Communication Influences Economic Outcomes in Neighboring Economies

Abstract: With policy rates at the zero lower bound, the ECB is increasingly relying on forward guidance to stimulate the economy. In this thesis paper, I show that the ECB's communication has important effects on economic outcomes both inside and outside of the eurozone. I use high-frequency price changes in financial assets around 197 ECB monetary policy announcements between 2002 and 2019 to construct exogenous communication shocks, which are applied as external instruments in a SVAR-IV. I estimate effects of the ECB's forward guidance on macroeconomic variables in the euro area and in several neighboring economies, with a focus on Sweden, Norway, and Denmark. I find that after an accomodative ECB communication shock, economic activity in Denmark and Sweden clearly increases. In Norway, some effects are of the opposite sign. Moreover, only the Norwegian krone seems to appreciate in response to the shock. My results are suggestive of a fear of floating-situation, in which Sveriges Riksbank eases its monetary policy stance in response to an accomodative ECB communication shock. This prevents the Swedish krona from appreciating and leads to expansionary economic effects.