Financial markets and legal challenges to unconventional monetary policy

This paper studies the empirical effects of legal challenges to monetary policy. Several policy measures of the European Central Bank have come under scrutiny before national courts and the European Court of Justice. These lawsuits have the potential to impact the scope and flexibility of central bank policies with important consequences for the economy. The number of relevant legal challenges is small and exact timestamps are often not available. Hence, we develop an econometric approach that searches for minimum variance regimes which we use to isolate and measure the effects of the rulings. Our results suggest that legal rulings addressing central bank policies have a significant effect on financial markets and can be linked to monetary policy uncertainty shocks.