Non-Linearities in International Spillovers of the ECB$^\prime$s Monetary Policy. The Case of Non-ERM II Countries and Anti-Fragmentation Policy

TL;DR

This paper examines how the European Central Bank's Anti-Fragmentation Policy impacts non-ERM II EU countries, revealing significant non-linear effects in the spillovers that depend on the sign and size of shocks.

Contribution

It introduces a novel approach to identify and compare linear and non-linear spillover effects of ECB policy using advanced local projection methods.

Findings

Sign non-linearities are significant in ECB spillovers.

Non-linear models better capture the impact dynamics.

Evidence of asymmetric responses depending on shock sign.

Abstract

We investigate the presence of sign and size non-linearities in the impact of the European Central Bank$^\prime$s Anti-Fragmentation Policy on non-ERM II, EU countries. After identifying three orthogonal monetary policy shock using the method of Fanelli and Marsi [2022], we then select an optimal specification and estimate both linear and non linear impulse response functions using local projections (Dufour and Renault [1998], Goncalves et al. [2021]). The choice of non-linear transformations to separate sign and size effects is based on Caravello and Martinez-Bruera [Working Paper, 2024]. Lastly we compare the linear model to the non-linear ones using a battery of Wald tests and find significant evidence of sign non-linearities in the international spillovers of ECB policy.