Abstract
Starting in June 2014, the European Central Bank (ECB) stepped up its monetary accommodation in order to counter a too prolonged period of low inflation in the euro area. This article offers a narrative of the monetary policy measures taken up to December 2016 and a review of the effects of ultra-low interest rates. The exceptional monetary stimulus transmitted to the economy broadly as intended. Moreover, it enhanced the financial capacity of economic agents to bear risks. At the same time, the ECB and the European micro- and macro-prudential authorities remained watchful of the unintended side-effects of an extended period of very low or negative interest rates for financial intermediation, financial stability and market discipline and took preventive or corrective measures as appropriate. A joint plan of action carried out by the 19 member countries with the aim to speed up balance sheet repair, accelerate the economic recovery and achieve higher productivity growth could have contributed to a more effective euro area macroeconomic and financial policy mix.
Highlights
Market interest rates in all advanced economies have fallen to record-low levels in the wake of the global financial crisis of 2008 affected by a variety of both global and domestic factors, including monetary policy
The European Central Bank (ECB) and the European micro- and macro-prudential authorities remained watchful of the unintended side-effects of an extended period of very low or negative interest rates for financial intermediation, financial stability and market discipline and took preventive or corrective measures as appropriate
This article offers a narrative of the conduct and consequences of ECB monetary policy from June 2014 to December 2016 as the euro area crisis had subsided, but a prolonged period of low inflation put medium-term price stability at risk
Summary
Market interest rates in all advanced economies have fallen to record-low levels in the wake of the global financial crisis of 2008 affected by a variety of both global and domestic factors, including monetary policy. The ECB responded to this new challenge with a substantial additional monetary stimulus using both standard and non-standard measures These included reducing policy rates to levels around the zero lower bound, targeted longer term refinancing operations for banks and large-scale asset purchases equivalent to “quantitative easing”,2. Some authors have argued that the central bank could take account of financial stability concerns when deciding on the optimal adjustment path for inflation (see (Smets 2014)) This preventive role for monetary policy was justified because the monetary stance affected the general attitude towards risk, the allocation of credit and the strength of the financial cycle, factors which in turn influenced the ability to maintain price stability.
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