Quantitative Easing in the Euro Area: Its Record and Future Prospects

Research Area: Monetary Policy, Financial Markets, Central Bank Law
Researcher: Günter Beck,
Julian Callow,
Alex Cukierman,
David Folkerts-Landau,
Peter Praet,
Stefan Schneider,
Volker Wieland
Date: Sep 2017
Abstract:

Over the past years, the European Central Bank (ECB) has adopted a new course. Its expansionary monetary policy has reached an unprecedented scale. With quantitative easing (QE), the ECB has almost quadrupled its balance sheet. The aim of this study is to shed some light on this phenomenon.

As a starting point, Peter Praet illustrates the expansionary monetary policy from the ECB’s point of view, giving account on the use of QE in response to disinflationary pressures. He outlines the impact on financial conditions as well as output and inflation, reaching the conclusion that “a strong and sustainable recovery from the crisis requires a comprehensive response that involves all economic policies“.

Subsequently, Julian Callow shares his view on QE from a markets perspective. In this context, Callow analyzes whether the “implicit intention of QE” has been reached, that is “to depress real yields and raise inflation expectations“. 

In their joint contribution, David Folkerts-Landau and Stefan Schneider identify the risks that emerge in connection with QE. In their view, the increasing concentration of risk on the Eurosystem balance sheet is alarming. However, according to the authors, the detrimental impact is even worse.

Looking back at the collapse of Lehman Brothers in September 2008 and, thus, a collapse in rates of growth of net banking credit and total net new bond issues, Alex Cukierman draws some lessons for the debt crisis in the euro area.

In their joint contribution, Günter Beck and Volker Wieland focus on the end of QE, making a proposal how to normalize monetary policy in the euro area. In this regard, they look at the key challenges of the exit and describe the need to develop an exit strategy in an environment characterized by financial and fiscal dominance fears.

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