Costly Independence: the unintended effects of the ECB's government bond purchases

This paper investigates the effects of government bond purchases by the European Central Bank (ECB) on the degree of fiscal policy accommodation (DFPA) communicated in its press conferences. I use a text mining approach to quantify the DFPA of the ECB and a proxy Factor-Augmented VAR to assess the impact of unconventional monetary policy shocks on the "fiscal stance" of the central bank. After deriving DFPA shocks with a VAR identied with sign restrictions, I run historical decompositions to tease out the impact of DFPA surprises on output and inflation. The results are twofold. First, I provide evidence that DFPA is inversely related to bond purchases. Second, I document that output and inflation would have been higher had the ECB held constant its DFPA. Overall, the findings point to a new unintended "doom-loop" between bond purchases and DFPA at the heart of the European Monetary Union (EMU).