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January 2015

QE + permanent debt purchases + fiscal expansion = helicopter money: recipes for the Eurozone

Biagio Bossone's picture

Is Quantitative Easing the solution for the Eurozone?[1]

Considering Quantitative Easing (QE) to be an effective way to save the Eurozone from deflation, De Grauwe and Ji (2015) argue that a QE programme can be so structured as not to pose a risk on German taxpayers – this risk being seen as the main obstacle against active policies by the ECB. However, they seem to miss some important points. 

First, they fail to recognize that there is little convincing evidence that QE has any significant effect on consumer price inflation: QE does not buy-up ordinary goods and services, and consequently it does not create consumer price inflation. QE has delivered positive effects only when it has been implemented in conjunction with decisive fiscal stimulus, since it has counteracted the interest rate rises that deficit and debt growth would have otherwise caused. Giavazzi and Tabellini (2015) note that an accompanying fiscal expansion is critical to QE’s effectiveness. Yet fiscal expansion does not appear to be an option in the Eurozone, especially in already largely indebted countries, as it would trigger offsetting effects linked to Eurozone members having issued debt in a non-sovereign currency, which would neutralize the action of QE combined with fiscal expansion.

Using administrative data to measure impact: an example from a business tax reform in Georgia

Miriam Bruhn's picture

Policymakers and researchers would often like to measure whether reforms have their desired effects, but it’s not always feasible to collect survey data to shed light on this issue. Here, administrative data, that is being collected in any case, can help. Administrative data has no additional cost and may be readily available, particularly in countries that digitize the information they collect.

The ‘safety trap’ and Eurozone secular stagnation

Biagio Bossone's picture

The ‘safety trap’ hypothesis and secular stagnation 

Noting that Eurozone inflation has been declining for almost a year, and constantly undershooting forecasts, Landau (2104) suggests that underpinning those evolutions, including the lack of growth, might be one factor: an excess demand for ‘safe assets’. Essentially — Landau argues — agents have responded to extreme risk aversion by developing a strong inclination for holding liquid and safe assets (typically money and government bonds). In order to accumulate more of these assets, they have reduced consumption and investment, thus depressing aggregate demand. When inflation is low and the economy hits the zero lower bound (ZLB), interest rates cannot reach their (negative) equilibrium levels and the economy falls into what Landau refers to as a ‘safety trap’, with cumulative disinflation, increasing real interest rates, and depression setting in. This sounds as a plausible explanation for secular stagnation in the Eurozone.