ECB Paper Gives Lessons on Improving QE as Draghi Orders ReviewBy
Researchers say program works best with clear communication
Macroeconomic benefits higher with longer-duration assets
European Central Bank researchers have assessed the institution’s 1.7 trillion-euro ($1.9 trillion) bond-buying program and come up with “a few lessons” for policy makers.
First, buying longer-duration assets brings more economic benefits. Second, back up the program with forward guidance about future interest-rate increases. Third, be clear about when the purchases will end and what will happen to the asset portfolio when it does.
The suggestions, in an ECB working paper published on Friday, come a day after President Mario Draghi said central-bank staff have been ordered to study how to ensure quantitative-easing doesn’t run out of assets to buy. QE is currently scheduled to expire in six months and, with inflation stuck near zero, his comments disappointed investors who were betting he’d signal an extension.
Researchers Philippe Andrade, Johannes Breckenfelder, Fiorella De Fiore, Peter Karadi and Oreste Tristani estimated that the impact of QE so far has been roughly equivalent to cutting interest rates by 1 percentage point. They also said it has led to “a re-anchoring of long-term inflation expectations.”
“The ECB’s expanded asset-purchase program was effective in easing further the stance of monetary policy in the euro-area economy,” they said.
By increasing government bond prices, the QE program gives banks “a form of capital relief,” which should boost lending and support economic recovery, the study found. The researchers also played down the risk of capital losses for the ECB, saying they will probably be contained because of the limited size of private-sector assets purchased.