Abstract
The European Central Bank adopted a policy of quantitative easing early in 2015, long after the US and UK, and after implementing a succession of measures to increase liquidity in the Euro zone financial markets, none of which proved sufficient eventually. The paper draws out lessons for the Euro zone from US and UK experience. Numerous event studies have been undertaken to uncover the effects of QE on yields on and prices of financial assets. Estimated effects on long-term government bond yields are then converted into the size of the cut in the policy rate that would normally have been needed to produce them. From these implicit cuts in policy rates, estimates of the effect on GDP and inflation are generated. Euro zone QE appears to have had a much smaller effect on bond yields for the core members states than did QE in the US or UK. Therefore its effects on output and inflation are likely to be proportionately smaller. Its effects on long-term government bond yields in periphery members are greater. QE is compressing interest differential among Euro zone member states. The dangers of QE to which various commentators draw attention, that it creates a danger of inflation in the future, that it creates asset price bubbles, that it allows zombie firms and banks to survive, slowing down the process of adjustment, seem remote. Meanwhile it makes a useful contribution to cutting the costs of debt service and allowing member states more fiscal room for maneouvre.
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Notes
Andrew Haldane, writing in the Financial Times, 18th September 2015, “Scrap Cash Altogether, Says Bank of England’s Chief Economist”, http://www.ft.com/cms/s/0/7967908e-5ded-11e5-9846-de406ccb37f2.html#axzz3mNPVUPxP. The FT journalist Chris Giles counters that scrapping cash invites tyranny: 23rd September 2015, http://www.ft.com/cms/s/0/ffdb3034-610e-11e5-9846-de406ccb37f2.html
An interesting consequence of the implementation of QE policies has been a revival of interest in theoretical models of the term structure in which such effects can occur. The development of the preferred habitat model by Vayanos and Vila (2009) is a case in point.
This analysis is described in more detail in Joyce et al. (2011b),
Speech given in Gloucestershire, 13 September 2011, “How to do more”, was accessed on 14 Nov 2015 from http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2011/speech517.pdf
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Acknowledgments
This paper is based on an invited presentation at the 4th UECE Conference on Economic and Financial Adjustments, ISEG/UL, Lisbon, 3rd July 2015. I am most grateful to participants at the conference and to colleagues and friends at the European University Institute, Florence, and Birkbeck College, London, for comments and suggestions. All errors of omission and commission remain nevertheless the responsibility of the author alone.
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Driffill, J. Unconventional Monetary Policy in the Euro Zone. Open Econ Rev 27, 387–404 (2016). https://doi.org/10.1007/s11079-016-9393-0
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DOI: https://doi.org/10.1007/s11079-016-9393-0