. eisenschmidt and t. vlassopoulos, ( 2016 ), “ the impact of negative interest rates on bank balance sheets : evidence from the euro area ”, ecb mimeo. bis central bankers ’ speeches question whether the second leg of the transmission – from financial conditions to real activity and inflation – is still intact. of course, the fact that this easing has occurred concurrently with the economy receiving new shocks poses a fundamental identification problem. or put another way, we have to be careful to avoid assessing monetary policy by “ looking out the window ”. 11 this describes the process of eyeing where certain key variables are today compared with the beginning of the policy, and then concluding that the policy has succeeded or failed. but this is not how rigorous economic analysis is conducted. given that the economy is never static, one always needs to assess a counterfactual scenario ; what would have transpired without the policy action. in that context counterfactual analysis has also helped us to measure the impact of our measures along another dimension : their macroeconomic propagation. our impact assessment on gdp and inflation spans a large and diverse suite of models, reflecting alternative modelling traditions, and capturing different transmission channels, in particular in relation to the impact of asset purchases. some models mainly draw on empirical time - series methodologies, while others draw on ( semi - ) structural macro models, with an important role for financial frictions, and on macro - finance term structure models. intuitively, the various model assessments share the idea that the relevant variable in modelling the impact of the app is the expected future path of central bank asset holdings ( i. e. the evolution of the “ stock ” of assets ) under the programme. in some models, the full path of the central bank portfolio enters the decision problem of economic agents upon announcement of the programme. this is consistent with empirical evidence from event studies which supports the view that financial markets respond on impact to the announcement of asset purchases, and even prior to the announcement when expectations of a programme build up. at the same time, for robustness considerations some models have entertained the alternative assumption that asset purchase programmes affect the behaviour of economic agents only gradually. such effects are compatible with a situation in which financial markets learn over time the implications of the central bank ’ s asset purchases, or in which such purchases trigger changes in local liquidity conditions. a related distinction across those model assessments is how this expected future path of asset purchases is mapped into the macroec

on a wide array of financial assets, implying a broad - based easing of financial conditions. the primary instrument in this regard is the app, which compresses the term premia which are incorporated in risk - free interest rates and thereby encourages investors to move up in the maturity and risk ladder and shift to other, non - targeted asset classes. the negative dfr in turn discourages selling agents from hoarding the additional liquidity, speeding up the process of asset reallocation and reinforcing the downside pressure on the long end of the term structure of interest rates. second, via the direct pass - through channel, our package eases borrowing conditions in the real economy by easing banks ’ refinancing conditions and supporting non - financial corporates directly. this channel is perhaps most prominent in the case of the tltros, which through built - in incentive mechanisms ensures that the funding cost benefit is passed on to borrowers. it also applies to our purchases of abs and covered bonds, which encourage banks to increase their supply of loans that can be securitised, and more recently our decision to start a corporate bond purchase programme. in addition, substitution effects induced by the tltros can result in a reduction in the supply of bank bonds, which translates into lower yield on bank bonds for the financial sector as a whole. in parallel, portfolio rebalancing supports this direct pass - through channel, as lower term spreads on public securities encourage a shift in the composition of banks ’ portfolios toward other types of exposures with a higher risk - adjusted return, especially loans. the resulting increase in credit supply lowers its cost. third, via the signalling channel, the policy package triggers a downward revision of market expectations for future short - term interest rates, which aids portfolio rebalancing and direct pass - through effects by further flattening the risk - free curve. in the case of the dfr, our forward guidance that rates will stay at present or lower levels for an extended period of time – and beyond our net asset purchases – tilts downwards the probability distribution of the expected path of future rates. the signalling channel also helps stabilise inflation expectations, thereby preventing an unwarranted tightening in real long - term rates with negative effects on investment and consumption. impact on financial conditions how do we know that these positive effects of our policy package are indeed occurring and that they are sufficiently powerful to achieve the desired outcomes? in terms of financial conditions, the evidence