The Interventions of the European Central Bank Throughout the Crisis

Abstract

Throughout the crisis, the ECB implemented a number of unprecedented measures with a wider and wider reach. These measures included a decrease of the policy rate to virtually zero, the extension of the maturities of its liquidity providing operations, an expansion in total liquidity injected in the economy, relaxing collateral requirements, the purchase of government and corporate bonds or allowing net liquidity to grow. This paper reviews and puts into perspective all these measures.The astronomic amounts of liquidity mobilised have put high hopes in the capacity of monetary policy to reactivate the flow of credit to the economy and support the recovery. However, the actual outcome seems to not have match expectations. In this context, this paper also discussed two important constraints limiting the actual capacity of the central bank to impact the economy. 1) assets and liabilities make up an unavoidable accounting identity which implies that any “fresh” liquidity created by the ECB by increasing its assets is simultaneously absorbed or “destroyed” from the liabilities side. 2) The high level of independence of the ECB comes hand in hand with a confinement to a very narrow mandate. Indeed, the questioning of the OMT by the German Constitutional Court explains why the “quantitative easing” of the PSPP cannot go beyond a pure mechanical implementation of the capital key. The PSPP has virtually no flexibility to focus on the most relevant market segments where the monetary transmission appears to be “broken”.