Much has changed since the beginning of “quantitative easing” (QE), the large-scale asset purchase programs conducted by all major central banks. The ECB is one of them. Ever since the start of these programs, central bank balance sheets were massively expanded. One of the problems with QE is that bank reserves are no longer scarce. Before the crisis, central banks used to adjust the supply of bank reserves to manipulate (both upward and downward) the interest rate on these reserves (which is, for instance, the effective Fed funds rate in the case of the Fed). Since this has become impossible after QE, central banks began opting for an alternative method: that is, paying interest on reserves (IOR). Besides all technical discussions about the effectiveness of this method (and we already had extensive discussions of this nature), there is something else going on. The technocrats of the ECB are overlooking something of great importance: their “new method” is politically unfeasible.

The Crisis of 2008

A History of Bank Reserves

The Exit Strategy of the ECB

The Political Feasibility of the ECB´s Exit Strategy


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