Wyplosz, C. (2014) “Is the ECB doing QE?“, VoxEU Organisation, 12 September.
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
The 4 September announcement by Chairman Mario Draghi has been greeted with enthusiasm by the markets and the media. It has been long awaited, and many believe that the ECB has finally delivered. This is not sure. The ECB intends to buy large amounts of securities backed by bank lending to households (mortgages) and to firms.
- Traditional quantitative easing (QE) is demand-driven since the central bank buys assets in predetermined amounts.
- The ECB’s version is supply-driven.
This means that it is not certain that the liquidity injections of “hundreds of billions” will materialise.
Relevant posts:
- Magnus, G. (2014) “The ECB and Sisyphus: it won’t be finished unless it does QE“, Pieria Online, 09 June.
- Varoufakis, Y. (2014) “How should the ECB enact Quantitative Easing? A proposal“, Thoughts for the post-2008 World Blog, 19 May.
- Merler, S. (2014) “Shrinking times – ECB excess liquidity falls below €100 billion”, Bruegel Think Tank, 24 April