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The effectiveness of the European Central Bank’s Asset Purchase Programme

Demertzis, Maria, Wolff, Guntram B., (2016), “The effectiveness of the European Central Bank’s Asset Purchase Programme”, Bruegel, 23 Ιουνίου

Central banks resort to quantitative easing when the normal monetary policy tool of low- ering the short-term interest rate is con- strained. This constraint typically arises from the zero-lower bound, ie the reluctance to cut nominal rates below zero. This can result in a real interest rate that, while negative, is still too high for an economy to quickly find its way back to full employment and equilibrium. Many indicators such as the low inflation rate, high unemployment rates, the current account sur- plus and high savings compared to weak investment suggest that the euro area is in such a situation. Quantitative easing attempts to address this situation through three different channels: lowering long-term interest rates to improve investment conditions and disincentivise savings (interest rate channel); purchasing relatively safe long-term assets thereby driving investors into riskier investments (portfolio rebalancing channel); and weakening the exchange rate (exchange rate channel).

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