Has the ECB lost its mind?

Christophe Blot (1) , Paul Hubert (1)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

This Policy brief analyses the recent expansionary decisions of the ECB in September 2019, which are now under scrutiny and have even been criticized. Recent facts confirm the need of an expansionary monetary policy, as inflation expectations are still decreasing and credit remains weak. We pay a special attention to the three types of risk evoked in the public debate. First, it has been argued that low interest rates could increase the households saving rate due to an income effect. We show that this does not materialize on recent data. We observe such a correlation only for Germany, and this already before 2008, casting some doubt on the direction of the causality. Second, it is argued that the banks' profits are at risk because of low interest rates. We show that banks' profits are steady and are recovering since 2012, and that the new measures are not expected to have a negative effect on bank's profits. Third, using a macro-finance assessment of financial imbalances, we do not observe the emerging of bubbles on housing and stock market. Although the downside should be carefully analysed, we conclude that the critics of the recent expansionary monetary policy does not rely on sound evidence. Finally, and in any case, a fiscal expansion would reduce the need for expansionary policies. A discussion of the euro area fiscal stance is needed.

Domaines: Economies et finances

Christophe Blot, Paul Hubert. Has the ECB lost its mind?. OFCE Policy Brief, 2019, 61, pp.1-14. ⟨hal-03403620⟩