Abstract
Inflation is on the rise again in the industrialised world. This has led to fears of a sustained surge in inflation. This article argues that while such fears may make sense in the US, they do not in the eurozone, where the monetary-fiscal policy mix has been much less expansionary than in the US. The fear expressed by some that the monetary overhang from the large injections of liquidity through quantitative easing might lead to inflation in the eurozone does not stand up to scrutiny either. The conclusion offers some observations on the monetary operating procedures in the ECB. It argues that in the future, when interest rates rise again, the ECB risks transferring all (and even more) of its profits to the banking system. This article proposes a way to avoid this unacceptable outcome.
Highlights
The amount of asset purchases was significantly higher in the US than in the eurozone
It appears that since the start of the pandemic, monetary and fiscal policies have been expansionary in both the US and the eurozone, but that the intensity of this expansion has been much higher in the former
This has led some to argue (e.g. Summers, 2021; Blanchard, 2021) that the US fiscal-monetary policy mix is excessive and exceeds the capacity of the economy to absorb it without major price increases
Summary
It appears that since the start of the pandemic, monetary and fiscal policies have been expansionary in both the US and the eurozone, but that the intensity of this expansion has been much higher in the former. I conclude from this that while the risk of inflation is real in the US, it is much less so in the eurozone, where monetary and fiscal expansion does not appear to be hitting capacity constraints in the economy. One might argue that this figure only measures the short-term relation between money growth and inflation, while the monetarist theory tells us that this relation only holds in the long run.
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