- euro exchange rate to a relative qe shock that expands the ecb's balance sheet relative to that of the federal reserve by 1 percentage point over the following nine months using a sample of observations that starts during the global financial crisis in 2008. the euro immediately depreciates against the dollar, peaking at around 0. 35 percent below baseline after nine months. the depreciation is quite persistent and statistically significant up to 18 months. chart 7 impulse response to a relative ecb - federal reserve qe shock usd / eur exchange rate and time - to - lift - off ( percentages and months to lift - off ) source : dedola, l., georgiadis, g., grab, j. and mehl, a. ( 2018 ). notes : the charts presents estimates of the response of the us dollar - euro nominal bilateral exchange rate to the relative qe shock that expands the ecb balance sheet relative to that of the federal reserve. the estimates are obtained from the two - stage least squares local projection regression. the shaded area represents 90 % confidence bands based on robust standard errors. regarding the transmission channels, a qe shock that expands the ecb's balance sheet relative to that of the federal reserve works to a significant extent through the “ signalling channel ”. it persistently reduces the euro / dollar short - term money market rate differentials and shifts market expectations regarding the timing of a lift - off further into the future ( chart 7, right side ). the largest contribution, stems from the effects of qe on residual risk premia in foreign exchange markets, as is shown in chart 8 ( see the red bars ). the substantial role of risk premia echoes the evidence from classic studies that a large share of the variation in the dollar exchange rate is attributable to this residual risk premium component. qe also exacerbates limits to arbitrage in foreign exchange markets, since it widens covered interest parity deviations reflected in the cross - currency basis, but not to an economically large extent. chart 8 decomposition of exchange rate response to a relative ecb - federal reserve qe shock ( percentages ) source : dedola, l., georgiadis, g., grab, j. and mehl, a. ( 2018 ). notes : the figure presents the decomposition of the exchange rate response to a relative qe shock that increases the difference between the growth rates of the ecb '

whereby the rest of the world adjusts its portfolio position vis - a - vis the euro area, contributing to exchange rate depreciation ). the model simulations indicate that global portfolio rebalancing is an important channel through which an asset purchase programme stimulates the domestic economy and that its presence can influence the evolution of the trade balance. in particular, the impact of portfolio rebalancing on the exchange rate is quite powerful in reinforcing the strength of monetary policy stimulus imparted by asset purchases. this results in a larger impact on gdp ( chart 17 ) and a more positive response of the trade balance ( chart 18 ). finally, according to the models, global portfolio rebalancing is more important for the transmission of an asset purchase programme than for the transmission of an interest rate shock. for example, results from the nawm ii show that the transmission of a domestic interest rate shock is largely invariant to global portfolio rebalancing frictions. chart 17 the effects of global portfolio rebalancing on gdp – evidence from dsge models euro area effects of a sovereign bond purchase programme with a total purchase volume of 10 % of gdp ( deviation from baseline levels in percentage points ) source : ecb calculations. notes : simulation of the effect of a sovereign bond purchase programme of approximately 10 percent of gdp, take the expected reinvestment during this period into account. all simulations are conducted with the short - term interest rate pegged to the effective lower bound. djp model : darracq paries m., jacquinot, p. and papadopoulou, n., “ parsing financial fragmentation in the euro area : a multi - country dsge perspective ”, working paper series, no 1891, ecb, april 2016 nawm ii model : coenen, g., karadi, p., schmidt, s. and warne, a. ( 2018 ). the new area - wide model ii is an extended version of the ecb's micro - founded model for forecasting and policy analysis with a financial sector. ecb working paper no 2200. chart 18 the effects of global portfolio rebalancing on trade balance – evidence from dsge models euro area effects of a government bond purchase programme with a total purchase volume of approx. 10 % of gdp ( trade - balance - togdp ratio, deviation from baseline in percentage points ) source : ecb calculations. notes : simulation of the