First, they estimate the effects of the ECB’s unconventional monetary policy on components of household income and wealth using a Bayesian vector autoregression (VAR) which includes variables that affect wealth – house and stock prices – and variables that affect income – the unemployment rate and wages.13 The APP shock is identified by assuming (i) that it affects the term-spread on impact, without leading to a change in standard monetary policy over the full sample14under analysis (which spans three years) and (ii) that it has a positive effect on the real economy, on impact.
15 The shock is scaled to a term-spread reduction by 34 basis points, which is the estimated level of the impact of the announcement of the December 2016 APP package on the euro area 10-year bond rates.