The Assumption that the Relationship between Monetary Easing and Inflation is Positive is Spurious

Abstract

The ECB stands by their monetary policy strategy of extremely low interest rates and large asset purchase programs in order to achieve their target inflation. However, using existing research, this paper demonstrates the decoupling of the relationship between monetary policy and inflation. There are two complementary theories which explain this. First, the negative interest rates drive people to save (or invest) rather than spend the money created through the asset purchase programs. The second theory links inflation with trends like globalization and demographics – a larger supply in labour (as we have seen in the last three decades) drives wages and hence inflation down. The lack of clear scientific and practical evidence for using a loose monetary policy to reach a specific inflation target raises the question of whether there is another motive behind the ECB’s current, ongoing strategy.