The ECB's Quantitative Easing: Early results and possible risks

08-12-2015

In early 2015, at a time when most indicators of actual and expected inflation in the euro area had drifted towards historic lows, the European Central Bank (ECB) announced that it would launch a new asset purchase programme, which would be similar in many respects to the 'Quantitative Easing' (QE) programmes launched earlier by the United States Federal Reserve System, the Bank of England and the Bank of Japan. Researchers have published extensively on issues relating to the programme. On one hand, empirical evidence from previous QE programmes (in the United States, the United Kingdom and Japan), shows that contrary to 'textbook' theory, the ECB's Public Sector Purchase Programme is expected to have negligible direct effect on the economy, contributing more through indirect effects. On the other hand, most researchers agree that the many concerns raised – e.g. there would be insufficient liquidity in the markets for the programme to have an impact; side effects would increase risks to financial stability or worsen income inequality; or that the risk-sharing arrangements could exert pressures on euro area solidarity in the event that a Member State declared bankruptcy − have not so far materialised. And, should they eventually come about, they would neither present significant risks to the euro area economy (in terms of direct losses or financial stability), nor create tensions between Member States, or between different population classes within a Member State. However, unwinding the current programme may present significant risks, so to avoid or at least mitigate them, careful planning of the timing and speed of the exit, complementing it with micro and macro-prudential supervision, as well as fiscal policy measures are all important. This briefing updates an earlier edition from the time of the ECB announcement.

In early 2015, at a time when most indicators of actual and expected inflation in the euro area had drifted towards historic lows, the European Central Bank (ECB) announced that it would launch a new asset purchase programme, which would be similar in many respects to the 'Quantitative Easing' (QE) programmes launched earlier by the United States Federal Reserve System, the Bank of England and the Bank of Japan. Researchers have published extensively on issues relating to the programme. On one hand, empirical evidence from previous QE programmes (in the United States, the United Kingdom and Japan), shows that contrary to 'textbook' theory, the ECB's Public Sector Purchase Programme is expected to have negligible direct effect on the economy, contributing more through indirect effects. On the other hand, most researchers agree that the many concerns raised – e.g. there would be insufficient liquidity in the markets for the programme to have an impact; side effects would increase risks to financial stability or worsen income inequality; or that the risk-sharing arrangements could exert pressures on euro area solidarity in the event that a Member State declared bankruptcy − have not so far materialised. And, should they eventually come about, they would neither present significant risks to the euro area economy (in terms of direct losses or financial stability), nor create tensions between Member States, or between different population classes within a Member State. However, unwinding the current programme may present significant risks, so to avoid or at least mitigate them, careful planning of the timing and speed of the exit, complementing it with micro and macro-prudential supervision, as well as fiscal policy measures are all important. This briefing updates an earlier edition from the time of the ECB announcement.